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There are many reasons why it can sometimes be a good idea to borrow money. It can make it possible to invest in assets in a way that makes financial sense – for instance, taking advantage of a discount on a new sofa that’s really needed, where the saving amounts to more than the interest on the loan. It can be about consolidating debt, using one big loan to pay off several smaller ones, which often results in lower overall interest payments and better terms and conditions. In some situations, it can be necessary to meet ordinary household expenses whilst waiting for a salary payment, especially if one has a variable income or creditors that are slow to pay. Getting a loan to pay for transport costs can also make sense by making it possible to stay in work and thereby keep bringing some money in. Whatever the reason, it’s something that should be approached with caution – and with a clear plan for paying the money back firmly in place.

Borrowing options

The simplest way for most people to borrow money is by getting a loan from the bank, but rates can vary a lot and people with poor credit records may struggle to do this at all. Social fund and credit union loans can be a good bet but what’s available can vary by location. The Citizens’ Advice Bureau can provide guidance on this. Credit card loans can sometimes be a good way to borrow, within agreed limits, but can be very expensive if not paid back on time. Payday loans with dedicated lenders work for many people but should not be taken on without a careful assessment of what their interest rates really mean if you are late in paying. Store card loans are sometimes worthwhile when they also offer deals or discounts, but can be very expensive and should be treated with caution.

Generally speaking, loans are easier to get if secured against an asset like a house or car. These are known as secured loans. It is important to be aware that the asset could be at risk if the terms of the loan are not met. When taking out a loan it is a good idea to avoid the comfortable assumption it will be paid off on time and make a back-up plan for what can be done if that doesn’t happen.

Borrowing on a car

Thinking about the assets they have available, many people are quick to say “I’ll borrow money on my car!” As with all loans, there are good and bad ways to approach this.

Various different types of loan can be secured against a car, so it’s wise to shop around for a good interest rate. The most common type, logbook loans, mean that the lender technically owns the car whilst the loan is outstanding, but it’s still available for the borrower to drive. A good lender will not simply take the car if things go wrong but will work with the borrower to come up with a workable repayment plan.

Although they can be expensive, loans against cars generally provide a reliable way to get a large sum of money in just a few days, regardless of credit history. They’re generally cheaper than payday loans as the existence of collateral lowers the risk for the lender.

Buying a car is a big financial investment. Most people are not able to pay cash for their new vehicle and must rely instead on car loans to make their purchase. In order to be able to make lower monthly payments, many people are now taking out loans that can take up to five years to pay off. The interest charges on these loans are quite high. By the time the car is finally paid off it will have cost many thousands more than if cash had been used to make the purchase.

In order to avoid the large outlay of money involved in buying a new vehicle, many individuals instead choose to buy a used car. This is certainly an option for some, but people who wish to own a new car can save money by following a few rules that make car financing less costly.

1. The first thing to remember is that cars are depreciating assets. As soon as a car leaves the lot it has lost several thousand dollars in value. Every year the car is worth less and those financing their car for five years are left with an asset that does not have much value. The best policy is to save as much cash as possible to pay for the car. Not only will this save a lot of money in interest over the years, it also puts the buyer in a position of power when negotiating car prices.

2. Decide on your budget before going to look at cars. Avoiding emotional buying is easier when you know how much you can realistically afford. Determine how much of a cash down payment you can afford without having to make sacrifices. There are websites that have loans calculators that allow you to check how much loan payments will be for various car prices.

3. Do comparison shopping of loans online. There are many websites that offer car loans at affordable rates. Getting a car loan at the dealership is not always the best option since every warranty or add-on that is purchased with the car will be added onto the loan and result in extra interest charges. Obtaining a loan before going to the dealership allows you to negotiate for a better deal. Do not immediately offer to pay the full price of the car. Car dealers expect to negotiate and the given price is never set in stone.

4. Car dealers love to up-sell their customers. Typical up-sells include extended warranties, rustproofing and fabric protection. Warranties can be purchased directly from the warranty provider. Car dealerships are only the ‘middlemen’ and stand to make a profit by selling them. Rustproofing is only necessary if you live in a place where a lot of salt is used on icy roads in the winter. Fabric protection is a personal choice but not generally necessary given the depreciating nature of vehicles.

5. Avoid negotiating ‘packed payments’. If the dealer tries to sell you a car based on the monthly payment you have to make, rather than the whole purchase price, be aware that this can add up to much more than the amount needed to cover the cost of the car.