Managing your borrowing
Last updated on 27 January 2016
Whether you have a mortgage, personal loan or credit card, it’s worth making sure you are not paying over the odds for your borrowing.
Review your borrowing
Part of good money management is to regularly review your borrowing particularly if your circumstances change. There are several reasons for this.
- If your income rises you may want to increase your monthly repayments so you can pay off loans and debts more quickly.
- If you lose your job or your income falls, you may need to look at ways of reducing your monthly repayments. This could mean extending the term of loans or asking for a payment break while you reorganise your finances.
- If your credit rating improves you could switch to cheaper borrowing.
- To check the cost of your borrowing is still competitive. For example, you may find your credit card provider charges more interest than its competitors.
- To ensure you’re still borrowing efficiently. For example, if you've had an overdraft for some time and are likely to need it for the foreseeable future, it may be better to take out a personal loan which charges less interest instead.
- If you’re paying more for borrowing than the interest you’re earning on your savings you may decide it’s sensible to use some of your savings to pay off your debts. However, you need to keep an emergency fund and be mindful that you may not be able to borrow the money again.
Switching to cheaper options
Different methods of borrowing suit different situations. If your circumstances change or you’re no longer borrowing at a competitive rate, you could consider switching to a cheaper option.
There are several ways this might be possible.
- You could take out a personal loan to pay off more expensive debt such as an overdraft, credit card or store card bill. Before doing this you need to be sure you can keep up the regular payments on a loan. Unlike an overdraft or plastic, you’re unlikely to be able to vary your repayments each month.
- If you're struggling to meet the monthly repayments on a loan you might want to see if you can extend the term (the period over which you borrow) to bring down the repayments. But it's important to understand that you'll be paying interest for longer so the loan will cost you more overall. Before doing this you may decide to get some free debt advice to review your finances.
- You may be able to borrow at a lower rate for a longer period of time if you secure the loan against your house. But bear in mind that if you fail to make your repayments you could lose your home.
Consolidating your borrowing
If you've borrowed money from several sources and are having trouble keeping track, you may want to consolidate your borrowing. This involves taking out a new loan to pay off all or several of your existing debts such as overdrafts, credit card bills and loans.
As well as helping you take control of your finances this also is an opportunity to reduce the cost of your borrowing. But consolidating your borrowing is not always a good idea. There are a number of things you need to consider.
- Can you get new credit? If you have a poor credit history you may find lenders unwilling to lend to you.
- Can you afford a new loan? If you just pay off the minimum on your credit cards each month, then you may not be able to afford the monthly repayments on a personal loan even if the interest rate on the loan is cheaper.
- Are there other ways to reduce the cost of your existing borrowing? For example, could you negotiate a better deal with your lender or could family help out?
If you do decide to consolidate your loans you can do this yourself with a personal loan but you'll need a good credit history to get a decent interest rate.
Or if you've got a good credit record, you could move your credit card debts to a card with a low or 0% interest rate. This is known as a balance transfer. You may have to pay a fee to transfer the debt and be aware that the interest rate will jump once you're out of the low or 0% interest period.
There are also debt consolidation schemes which are advertised on TV and in newspapers. But be very wary of these as the new loans they offer are usually secured against your home so you could lose your home if you’re unable to keep up the repayments. Also, this type of borrowing often comes with stringent penalties if you’re late with payments, go into arrears or want to pay off the loan early
If you're struggling with your debts, it's a good idea to talk through your situation with a recognised debt advice agency such as the Citizens Advice Bureau, Step Change or National Debtline. These organisations offer free, unbiased advice.
For general help and guidance on money you can contact the Money Advice Service helpline on 0300 500 5000.