At the beginning of 2018, it appeared as though consumer borrowing was on course for a prolonged and gradual decline. This was after debt levels peaked at the end of last year, with borrowing levels subsequently growing at the slowest rate since 2015 during the first and second financial quarters.
However, British lenders are now expecting the demand for consumer borrowing to pick up during the third financial quarter, with the Bank of England (BoE) hinting at this as part of a broader economic recovery.
While this may be good news for the economy, however, it’s crucial that individuals learn how to borrow responsibly and safeguard their own financial interests. In this article, we’ll look at the cost of borrowing and how to calculate repayments.
- Understand how Loans Work
They say that knowledge is power, and nowhere is this more relevant than in the financial market. After all, how can you hope to borrow money responsibly in instances where you don’t understand how these arrangements work?
In simple terms, loans are extended by service providers who will dictate the terms and the time-frame for the repayment. There is also a cost associated with borrowing money, with the interest rate applied increasing the total amount repayable and your monthly commitments.
It’s important to factor these into the cost to your loan, as otherwise you could end up borrowing more than you can realistically afford to repay.
This is also one of the main reasons why you should shop around for the best loan and real-time offer, as this helps to minimise the cost of borrowing and ease your financial burden.
- Use Tools that help you to Calculate the True Cost of Borrowing
It’s also important that you access viable tools that can help you to calculate the precise cost of borrowing, taking into account your choice of lender and the interest rate applied.
In truth, reputable lenders should always include loan calculator tools, which let you enter in your requirements and work out the exact amount to be repaid within a fixed period of time.
Just be sure to use this type of resource to its fullest, by experimenting with different loans amounts and determining to total amount due. You should bear in mind that unsecured, personal loans typically carry higher rates of interest, as this enables lenders to offset some of their risk.
- Budget your Finances in Detail
It’s also important to remember that a personal loan represents just one aspect of your finances, and one that must be repaid in line with other debts and costs.
So, in order to accurately calculate the current and future cost of borrowing, you should create a budget that measures your income against your outgoings and expenditure on a monthly basis.
This will leave you with a fixed amount of disposable income, which will effectively translate into an affordable loan repayment. You’ll also need to account for any potential or likely changes to your circumstances, while remembering that late payments will increase the cost of borrowing and leave you further mired in debt.