Five tips for borrowing responsibly during the cost-of-living crisis
Inflation hit an unwelcome 30-year high of 7% last month and 2022 has seen the cost-of-living grow at an alarming rate.
This led the Bank of England to increase the base rate to 0.75%, however families are still being hit hard by increasing energy costs and food prices, as well as the National Insurance Contribution hike.
As such, nearly 40% of Brits are concerned about their finances, according to research from the University College London, the highest level since the start of the pandemic, and a significant increase from the start of this year.
Savvy Brits are already looking at ways to reduce their costs, but which still enable them to do the things they want to do.
At Novuna Personal Finance – winner of the YourMoney.com 2022 Awards in the Best personal loan provider category – we have seen a steady increase in the average loan amount applied for and taken.
This is because usually the rates on loans under £5,000 are a lot higher than loans over £7,500, so depending on what you want to use the loan for, you may find it cheaper in the long run to borrow slightly more, but at a reduced interest rate.
We have also seen a clear correlation between the amount borrowed and the term of the loan, demonstrating that some borrowers are spreading the cost over a longer period to reduce their monthly repayments and mitigate the impact of the current crisis.
With more people depending on affordable credit to spread the cost of day-to-day spending, it is important to understand the difference between the two main types of loans – secured and unsecured.
Secured loans are linked to an asset, such as your home or your car, which is at risk if you cannot pay back your loan.
Unsecured loans on the other hand do not require you to put up an asset as security to the lender, allowing you to borrow the money outright after the lender undertakes the relevant credit checks.
Secured loans tend to offer lower interest rates or APRs compared to unsecured loans and credit cards, mainly because they are secured against an asset which you could lose if you fall behind on payments, so the risk is far higher to the borrower than with an unsecured loan.
Whether you have already taken on a loan or are planning to do so later this year, here are five tips to consider to help you borrow responsibly amid the current cost-of-living crisis.
1) Look for providers offering flexibility
Look for a provider that enables you to tailor or flex the length of your loan from the outset once you have been accepted. This enables you to adjust the length of the loan to see what impact that has on your monthly repayments before you sign the agreement.
2 Look for well-respected providers you can trust
With borrowing on the rise, many providers are offering attractive early rates to tempt borrowers in.
However, it is important to take out a loan with a trusted provider. A good place to start is reading reviews from existing customers which can be found on their website, social channels, or third-party sites such as Feefo.
What you are looking for is reassurance that under any circumstances you can talk to the provider and get any issues resolved quickly. This is particularly important if you fall into financial difficulties.
Look for lenders that aren’t afraid to show all their customer reviews, good and bad, and have clear points of contact.
3) Review your existing loans to see if you can consolidate
Personal loan rates have remained competitive in recent years with record low rates, but that may change as the market adjusts to rising inflation and pressures across the economy.
So, now is the right time to review your current loans and repayment terms. You might be able to consolidate at a cheaper APR on a higher loan amount, and reduce your overall outgoings.
4) Check the small print – do you understand the T&Cs of the loan?
Exercising caution when taking out a loan is essential. All too often, people overlook the small print of a contract. However, reading them thoroughly will equip you with a good understanding of your rights as a borrower and what your lenders can do for you.
For instance, some firms might charge fees, which is normally only revealed in the terms and conditions of the loan. The APR will be different depending on the lender, and so will the T&Cs.
5) Consider the amount you want to borrow
Before applying for a loan, make sure you have a valid reason for borrowing the can justify how each penny will be used.
Consider the amount you need to borrow. Do you want to borrow a larger amount and get a lower interest rate or APR, or do you take a smaller loan which may cost you more in interest?
Use the loan calculators on a lender’s website to check out the impact of different loan amounts and the interest charged, as they do vary. This way, you will know which loan is right for you, and prevent you from overstretching your wallet.
There will always be a market for those looking to borrow responsibly, but with rising prices and lenders’ tightening their affordability tests, choosing both the right provider and the right type of loan for you is essential to give yourself peace of mind over the long-term.
Theresa Lindsay is group director of marketing at Novuna Personal Finance