It’s better to pay for unexpected expenses with your emergency fund than to borrow money. But life sometimes throws a curveball that necessitates a need to look for outside resources. If this happens, it’s important to carefully consider your borrowing options and assess the risks. Here are two important questions to consider If you're thinking of borrowing money: (1) Do you really need to? and (2) Can you afford to?
If the answer to both of these is yes, you are in a position to start looking at your options. One common thing about the borrowing options is that you’ll typically pay interest on what you borrow. So when you borrow, you will pay back that amount, plus any interest. There may be other charges or fees involved too. Below is an overview of some of the most common forms of borrowing:
1️⃣ Personal loan:
This is usually a fixed amount borrowed over an agreed period of time. The loan is repaid in monthly instalments until paid in full at the end of the period. This is one of the cheapest forms of borrowing.
2️⃣ Overdraft:
Your bank account provider allows you to take out more money from your account than you have in there. This is supposed to be a short-term form of borrowing. Be aware that if you go overdrawn without the permission of the bank, or over the overdraft limit, the charges may be very high.
3️⃣ Credit card:
This is used to purchase items. The money doesn’t come out of your bank account – instead, you receive a statement of your borrowing at the end of each month. The features offered and the interest rate will vary from card to card. If you pay off the balance in full each month, you won’t pay any interest.
4️⃣ Store cards:
These function in a very similar way to credit cards, with the key difference being that you can only use them in stores that belong to the same group. They’re not as flexible as credit cards and tend to be more expensive because they usually have a higher APR (Annual Percentage Rate).
5️⃣ Payday loan:
Very short-term loans intended to provide you with money until your next payday. These loans have extremely high APRs and some equally high penalties for missed repayments. All other forms of borrowing should be explored before considering a payday loan.
6️⃣ Mortgage:
This is a type of loan specifically for buying a home or other properties. Mortgage interest rates are generally fairly low because your home secures the loan. But considering the long repayment period, the total interest paid can be large.
Once you’ve decided how you’re going to borrow the money, it’s important to immediately make a plan for paying it back. The last thing you want is for a temporary setback to turn into long-lasting or ever-increasing debt.
About Nike
Oyenike Adetoye (aka Nike) is an impactful speaker, author and personal finance expert. A Chartered Management Accountant by profession. Nike is the founder and CEO of LifTED Finance, a private financial firm that educates, coaches and supports people on their journey through financial fitness and wealth management.