What I learnt from my encounter with debt at a young age
We live in a world where borrowing money is easy; Student Loans; Credit Cards; Overdrafts; Pay Day Loans; but what are the risks of taking advantage of this borrowing?
When I started at university (a good few years ago now!) at the Freshers’ fair a high street bank offered me a credit card which allowed me to borrow up to £500. I made use of the card going out and having a good time in Freshers’ week. Of course, no one gives you free money so, later in the term I was having to cut back on going out to pay back the money I had borrowed.
When you borrow money it is not free, unfortunately you will need to pay it back!
Not only do you pay back the amount you borrowed but you will likely have to pay back interest. Interest is effectively the charge you pay for borrowing the money.
The level of interest depends on the type of lending. Whilst student accounts might give you interest-free borrowing for a period, this will expire. Some other types of borrowing can have very high rates of interest.
Let’s take pay day loans where you might borrow £100 (to tide you over in the short term) but you will pay back £125 in a month’s time, a cost of 25% just over one month. Say you then had to take out another loan to pay back the £125 at the end of the next month you would owe £156. If you kept doing this by the end of a year the £100 would have cost you £1,455!
Of course, not all debt is bad, and often people borrow money for good reasons such as buying a house or perhaps a car to get to work. Sometimes people borrow more money than they can afford to pay back. This might be because they didn’t realise the cost, or maybe because when they took out the debt, they could afford the repayments but something happened, perhaps they lost their job, and as a result they could no longer pay the debt back.
But what happens if you can’t pay back money you’ve borrowed?
Well in the long run it could affect your credit rating, this is a score that financial institutions use to determine whether they are happy to lend you money in the future, a bad credit rating means that you may not be able to get a mortgage to buy a home or borrow money in the future for important purchases or maybe to start a business.
The important thing is to only borrow money you really need to and to make sure you can afford to pay back.
Think about:
- Why you are borrowing the money?
- Is it really needed?
- Could you save up for what you need?
Then, if you do decide to borrow money, make sure you sit down and run through how much money you have coming in and how much you have going out and that you can afford the repayments.
If you are unfortunate enough to get into debt problems, there is lots of support out there from services such as Citizens Advice and it’s always best to start dealing with the issue as soon as possible.
If you need to borrow money make sure you understand the implications and take informed decisions.
