I need to borrow some money

Thinking about borrowing money for the first time? This borrowing advice for young people should help you steer clear of getting into bad debt.

"This will cover you for a few hours..."

Do you REALLY need to borrow money?

We’re not asking to be boring grown-ups, but it’s vital to weigh up how important this money is if you’re looking to borrow money, compared to the stress of going into the red.

Good reasons to borrow money:

• Because whatever you’re purchasing – a car so you can get to work, an education – it will have a long term positive effect on your life (shiny new devices don’t count).
• You can afford to pay it back quickly
• You’ve budgeted and had a good think about whether you can afford the monthly repayments.

Bad reasons to borrow money *waggy finger*:

• You really, really want that new pair of shoes/holiday/phone, even though you can’t afford it.
• You need to use credit to pay for vital supplies like food, heating, etc. This is a sign you either need to change your priorities or seek debt help.

So having weighed things up, you want to borrow some cash – where’s the best place to go?

Safest: The bank of mum and dad

Asking your parents for financial help is usually the safest and best place to start. They made you with their loins – therefore they’re less likely to offer you massive interest rates or get out a cattle prod if you miss a repayment. Asking them for help doesn’t mean you’ve failed as a grown-up, in fact you’re just making an adult decision about the best place to borrow money. Sit them down, explain why you need the money, and ask if they’re capable of helping. Of course, this only works if you have some kind of vaguely-functioning relationship with your folks.

To this end, have a good chat with them about their expectations – when do they want the money back? Can you get it to them on time? They may not charge you actual interest, but the emotional cost of a family feud over money can get pretty high.

Next safest: Use an ‘agreed overdraft’

An overdraft is something your bank can bung onto your current account that allows you to ‘dip’ into money you don’t have. They can be cheap, short-term ways of covering unexpected costs as long as you get them approved by the bank first (called an ‘agreed overdraft’).

Warning – if you go into the red and you’ve not OK’d it with Mr. Bank Manager, you could get hundreds of pounds worth of fees a month. If you’ve got a legit overdraft, then it’s quite a cheap way of borrowing a bit of extra funds. Read more about overdrafts here.

Other ways to borrow money

There are other ways to borrow cash, and they all come with their positives and negatives. Read our types of credit article to work out which option is best for you. If you’re considering getting a payday loan, we properly recommend you read our article about them here, as the huge interest rates these companies charge can set you off on a debt spiral terrifyingly fast.

Can I afford this debt?

Getting into debt is easy. Getting out of it, not so much. So before you think about how to borrow money, follow the tips below.

Borrowing money almost always ends up costing more than the original sum because you have to pay interest. So, you need to make sure you can handle all those monthly repayments. But how, you ask? Here’s how.

1) Make a budget

One of the first things you need to do is sit down and make a budget, to work out exactly how much ‘spare’ cash you have at the end of each month. If you have zilch left, then you can’t really afford to take on any new debt, unless you cut back on your budget somewhere else. Once you know how much money you can use for debt repayments, you can start looking for deals.

2) Shop around for the best deal

Interest – the amount you pay back when you borrow money – is calculated using an annual percentage rate (APR). It gets pretty complicated, but basically the higher the APR the more you’ll pay back. A good deal can save you a fortune over time.

3) Take the family option – but only with lots of discussion

Getting a loan from the bank of mum and dad? You lucky, lucky person – parents tend not to charge interest and are usually more sympathetic than banks when you need to take a repayment holiday.

On the other hand, while your folks may not charge interest, you could be getting into a world of emotional debt. So it’s important to have a clear discussion about what’s expected of you, when you’ll repay, and how.

4) Pay off as much as you can as quickly as you can

The point of debt is not to make it last as long as possible (‘wow – I don’t have to pay this off until next year!’) but to get rid of it before it burns a hole in your bank account. Credit and store cards often let you make ‘minimum payments’ – this is a trick to squeeze interest out of you. Ignore them and pay off as much as you can.

5) Understand the difference between good debt and bad debt

Good debt is debt that will pay for itself in the long run. Good debts are planned, affordable and thought through.

A good debt is also one where you’ve researched what’s best for you in terms of interest rates, repayment times, and late fees.

Good debt examples:

• A student loan, as graduates earn more over a lifetime than people who haven’t gone to university
• A mortgage, if, of course, you can ever get one. Once it’s paid off, you have somewhere to live and your home is likely to grow in value over the years.
• An affordable car – so no, not a BMW convertible – so you can get to and from work, meaning you earn a living.
• A good debt is also one where you’ve researched what’s best for you in terms of interest rates, repayment times, and late fees.

Bad debt

Bad debt is where you can’t afford the repayments comfortably and the debt hasn’t contributed much to your future. Bad debts are usually caused by impulse buying or borrowing too much so the interest gets out of control – as tends to happen with credit cards.

Bad debt examples

• Large purchases such as a massive holiday you pay off over time, with interest added. Holidays are great, but do you need your own private island in the Maldives?
• New car/shoes/phone just because you want the best, even though you already have one. Just think how quickly the value of these things deteriorate.
• Using payday loan companies – their tempting short term loans offer quick cash, but the high interest rates mean that if you fall behind on payments you’ll quickly end up swamped in debt.

6) Avoid borrowing money to pay off your bills

This is also bad debt – but we’re betting you don’t care by this point as you’re so stressed by money worries. If you’re struggling to get by at the end of each month, ask for money advice before getting yourself into extra debt. Trusted places like StepChange and the National Debtline are good places to go. Head here to read The Mix’s article on getting free help with debt.

7) Plan long term (as in a whole year away)

You’re young and fit. But sometimes the world bites a huge hunk out of people for no apparent reason. You could get made redundant, or you break your back and have to be off work for six months. Before borrowing money, consider how you’d pay it back if something big happened. How quickly would the amount you owe spiral out of control? What would your payment options be?

And while we’re all here, our top three tips for money-borrowing satisfaction:

Go for low to no interest, if you can possibly help it. Be wary of deals screaming ‘0% interest’ though – interest free periods don’t last forever, once the deal ends you could get stung with a big interest hike.

Make sure you can pay it back in time. Missed payments mean more interest, late fees, angry letters and a whole world of pain.

Work out how much the loan will cost you overall, once you count the interest. You can never just borrow £100 (unless you have very generous parents/mates). You always need to factor in the interest on the loan, and work out if you can afford that extra amount.

If you’re worried about debt and money, know that you’re not alone and there are people out there who can help. The Mix are here to provide you with emotional support, so don’t hesitate to speak to our team.