Borrowing cash? Here’s what to watch out for

Nothing in life is ever straightforward. So at various times in our lives we are likely to need to borrow money. Sometimes borrowing can fund a big financial commitment, like a mortgage. Alternatively, you might enter into an ongoing credit agreement to buy a car and change models every few years.

But more commonly, you might need to borrow money to pay for a specific purchase or to get you through a tricky period where money is tight.

Loans and credit can be unnecessarily complicated. In my opinion, many financial businesses make it far too difficult to understand how much you will pay for borrowing money. It’s near impossible to figure out how much precisely you’ll be paying on your credit card of through an arranged overdraft.

No one wants to answer the door to a bailiff so be prudent with your borrowing (Picture: Andrey Popov/Adobe)

Here’s my guide on what to watch out for if you are borrowing money.

Start by choosing a lender who is upfront and clear about what you will pay for the money you borrow, including additional fees and charges – and make sure they have a contact number so you can get in touch if something goes wrong.

Always plan for the unexpected. If you buy goods on a “buy now, pay later” credit, you might think you’re borrowing money for free. But ask yourself if you will still be able to make the payments if an unexpected life event happens. Even if the business doesn’t charge fees for missed payments, you could find yourself facing a debt collector.

Annual percentage rates (APRs) – the way interest is calculated over a year – are ridiculously complicated.

So when shopping around for the best credit deal, always look at what you’ll pay in total, in full at the end of the agreement. If this illustration isn’t provided, then be wary.

The longer you take to repay the loan, the more you’ll pay in interest. This can be a considerable amount even if you opt for a five-year rather than a three-year loan.

Don’t get too ambitious, though. It’s better to agree affordable repayment amounts over a longer period than to opt for short-term borrowing where payments are unaffordably high.

If you’re using a credit card abroad, never withdraw cash from a machine. It’ll cost you a fortune and you’ll be hit with a range of expensive fees too. These charges also apply in the UK, though they’re slightly less expensive. Withdrawing cash on a credit card can also be a red flag to lenders, suggesting that you are struggling financially.

If you don’t use your credit card, you could be hit with a “dormancy” or “inactivity” fee by some card providers. So if you’re being sensible and keeping the card in a drawer for emergencies, remember to check your statements each month regardless.

You can pay a price for being good, too. Some lenders will charge you an early repayment fee for paying off a loan early. The same goes for your mortgage. Ask up front before you take out a loan if there’s a charge for paying it off before the official end of the agreement.

Keep an eye out for “built in fees” when looking at loan or finance agreements, like “origination” or “application” fees.

An origination fee is an upfront charge for things such as administration, credit scoring charges and other “back office” work. Legally, the lender must give you an estimate explaining these fees so check proposed deals thoroughly.

Check out innovative forms of borrowing. Businesses like Creditspring offer loans on a subscription basis, rather than charging APR rates. You pay a fee every month instead.

When you take out high-interest credit loans or credit cards, the credit provider is betting you won’t be able to meet your obligations over the course of the arrangement – and will end up paying them much more in interest. Often, they are right. So be realistic about what you can afford to pay to clear your debts – and build in wriggle room in case of emergencies. Reduce the credit limit too, if you’re likely to get tempted to have a blow-out.

Martyn James is a leading consumer rights campaigner, TV and radio presenter and journalist. Read more of his articles here.