What are the pros and cons of borrowing?

Are you a young person thinking about borrowing money? Borrowing can be a bit like choosing between different paths on a road trip. Each path has its own sights to see and challenges to overcome, and the decision you make can influence your journey.

In this article, we’ll explore the pros and cons of borrowing, much like considering the routes of your road trip. Then, we’ll provide you with three practical tips to help you make informed decisions and stay on the right path on your financial journey.

Note: you can’t apply for a loan or other forms of credit (e.g. credit card, overdraft) in the UK if you’re under 18, and some loans will require you to be aged 21 or older.

Pros of borrowing money

Achieving your goals – borrowing can be the fuel that powers your road trip, enabling you to visit exciting destinations like higher education, a new home, or a business idea that might otherwise remain out of reach. Goals like these might also lead to being financially better off in the long term.

Building credit history – responsible borrowing and repaying on time can help you build a positive credit history. It’s like collecting stamps on your travel passport, which establish your track record. This can help your chances of being approved for future loans, such as getting a mortgage or securing lower interest rates on a loan.

Emergency financial support – life’s journey can take unexpected turns, like a punctured tyre during your trip. Borrowing can serve as your spare tyre, ensuring you have the money to take on unexpected financial challenges. While ideally a person would have savings for emergencies, this isn’t always possible or sometimes the amount of savings isn’t enough. Borrowing can bridge a gap during emergencies, ensuring you have the funds you need to help solve your problems.

Cons of borrowing money

Interest costs – borrowing involves road taxes, and the longer the journey, the more extra charges you’ll pay. When you borrow money, you’ll likely have to pay interest on the amount borrowed, which can significantly increase the total price of whatever you’ve spent the money on. For example, if you borrow £3,000 to buy a second-hand car and plan to pay it back over three years, if the loan has an interest rate of 15% APR then by the time you pay back the loan, the car will have cost you £3,700. You can calculate the cost of a loan using a Personal Loan Calculator.

Debt burden – borrowing is like adding extra luggage to your car. Too much debt can weigh you down, making your journey more challenging. It can be stressful and impact your mental well-being. It can also hinder your ability to achieve your financial goals. Monthly loan payments can reduce the income you have left after paying for essentials (e.g. rent and food) and make it challenging to save for an emergency fund, travel, or other long-term goals. Ask for help if your debt is negatively impacting you.

Risk of default – failing to repay borrowed funds is like running out of petrol in the middle of your road trip. It can damage your credit score and financial reputation. Defaulting on loans can have long-lasting consequences and may affect your ability to borrow in the future.

Three top tips

Create a budget

Before you borrow, assess your current financial situation and create a detailed budget. Work out how much you can comfortably afford to borrow and repay without straining your finances. Consider all monthly expenses, including loan repayments, and factor in unexpected costs.

Compare lenders

Don't rush into borrowing from the first lender you come across. Shop around and compare interest rates, terms, and fees from different financial institutions. Choose a reputable lender that offers competitive rates and transparent terms. As a minimum precaution, always make sure they are registered with the Financial Conduct Authority. If they aren’t registered, they are acting illegally and may be a scam or loan shark.

Understand the terms

Read the loan agreement carefully. Make sure you understand the terms and conditions, including the interest rate, repayment schedule, and any penalties for late payments. If something is unclear, don't hesitate to ask questions or seek advice from a financial advisor.

In conclusion, borrowing money can be a useful tool for achieving your goals and handling unexpected financial challenges. However, it’s essential to weigh up the pros and cons carefully and make informed decisions. By following the tips provided, you can borrow responsibly and set yourself on a path towards financial success. Remember, your financial future is in your hands, so make choices that align with your long-term goals and well-being.