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BORROWING AND HOW TO SAVE

The act of borrowing is the cheapest route since it is often used to imply the use of an item or indeed a person for free for a period of time. "Can I borrow your husband for 5 minutes" or "can I borrow your lawn mower mine is broken." We all borrow at one time or another and most times remember to give back what we had on free loan.

In the world of finance borrowing means having the use of money for a period of time which we pay back in a lump sum or in instatements - PLUS an amount of INTEREST for the privilege.

Interest varies with a number of situations some of which we can control, others less so.

National Interest Rates (Bank Rate)

Set as the national bank rate it reflects your counties economy and is highered or lowered to stimulate or discourage borrowing and spending by the general and business population.

We should be aware of the current trend as the likelyhood of rates staying unchanged or likely to increase or decrease. We would be UNWISE to borrow if rates are on the way UP, and perhaps prudent to do so when rates were LOW, provided we can fix low rates for a period (2-5 years typically).

Your credit status

Dependent on your credit score will rule if you can borrow money at all, and if so at what rate, Good credit risks can borrow for close to the BANK RATE whereas very bad risks can pay 30-50% on borrowings.

Preserving a good credit status is vital if we are borrow money at a decent rate, the factors which influence your score include;

• how long at the same address - the longer the better as it shows stability
• existing good record of borrowing and keeping up payments - people who have never borrowed are in one sense a worse risk as they have NO HISTORY.
• having a regular job or business and being able to prove income.
• having a bank account and having a good reference from that bank.
• being married
• having a home telephone number.

The interest rate

The better you are as a risk the better the rate you will secure, but watch how rates are described. Be sure you understand the TRUE interest rate and the TOTAL interest you will repay on top of the loan.

Watch for lenders who say interest rate is 6% (which means a flat rate) when the true rate is nearer DOUBLE. Most lenders are now required by law to disclose all lending data, but riskier lenders who charge extortionate interest rates may mislead customers in an attempt to imply they are lending at cheap interest rates.

The loan term

The length of time you borrow over varies with the value of the loan, risk and your own needs as regards affordability. The longer the term the cheaper are monthly repayments BUY it does mean you pay more in interest.

Borrowing for a short a term as possible with the MAXIMUM safe repayments is best and cheapest.

Secured or Unsecured

If you can give security for a loan you will get better rates than if you cannot or will not offer the lender some protection.

Secured means the lender can, if you default on repayments call in the security. Normally this would be a motor vehicle, piece of equipment, or property typically your home.

Using your home for security is potentially risky and it is vital to nor risk more than 50% of its value, although loans of 90-110% are frequent especially with young people buying property for the first time.

Types of secured borrowing

• security for an overdraft with a bank for SHORT TERM borrowing - cheap and flexible but for larger loans. For customers with a good credit rate and known history with the bank unsecured borrowing can be easier and close to the same rate as secured borrowing.
• mortgages (called first mortgages) to allow you to buy a property.
• remortgages (still a first mortgage if it is the only secured loan on that property) - to allow you to borrow against an existing property perhaps to repay existing borrowing and/or to raise money.
• 2nd mortgages - a further advance on an already mortgaged property subject to there being enough EQUITY (value) in the property. In theory you could have MANY mortgages on a single proper all with different lenders provide the total amount owed is lower than the properties value. These types of loans are more costly than FIRST mortgages but cheaper than unsecured borrowing.

In summary

• avoid borrowing at all if you can, or borrow as LITTLE as possible, rather than as much.
• preserve your credit status - it reflects in your ability to borrow and at what rates.
• repay over the shortest period possible to keep interest costs down.
• shop around for interest rates
• remember your APPLICATION for borrowing is usually recorded by most credit reference agencies, so be sure you want to complete the loan if successful. A lot of LOAN APPLICATIONS on record may deter some lenders as it suggests you have been REFUSED elsewhere, although you may have not completed an offered loan for other reasons.

Please feel free to Contact Us with questions or to give us information to add to our knowledge base.