With the Bank of England increasing the bank rate to the highest level since 2008 in September, financial tension is rising across the country, and millions of Brits are looking for viable options to see them through the cost of living crisis. In the aftermath of the pandemic, many people have very little, if any, savings to support them through this period of high inflation, leaving many with no option other than to borrow money.
Our recent survey showed that UK adults expect to borrow a staggering £101.1bn in the next twelve months, with credit cards listed as the most popular method of borrowing.
Taking out a new form of credit will be necessary for many in order to keep up with rising energy prices, rent/mortgage payments and feeding their families. However, in a financial crisis, it’s more important than ever to be borrowing responsibly to ensure you aren’t left with unmanageable debt and sleepless nights.
Here are four areas to consider:
Choose the best product for your situation
With a wide range of different credit providers offering various forms of credit; it can be easy to jump at the first opportunity, but this isn’t always the best option. Thirty-six percent of people are unsure whether they have the best financial product for their situation, and by choosing the wrong product you could run the risk of encountering difficulties later on, such as paying more interest than is necessary.
Checking customer reviews for potential credit providers is a good idea to understand which are performing well for their customers, and which have received any recent complaints or concerns. Providers will make bold claims in an attempt to secure your business, so checking whether these claims run true in practice is vital.
While credit cards are a clear favourite at the moment, it might be that an unsecured loan, additional mortgage borrowing, Buy-Now-Pay-Later scheme or some other form of credit is a better option for your circumstances, so always shop around and research all options.
Be confident with the T&Cs
The specific terms and conditions (T&Cs) of any credit agreement will vary across providers and products. The T&Cs will state important terms, such as how much you’re borrowing, the APR and APRC (interest rate and fees combined over time), how long you’ll be repaying, how and when the payments will be taken, and any early repayment charges. If you don’t understand any aspect of the T&Cs, the lender will be able to explain these to you. Never sign a credit agreement without being confident about the terms and conditions.
Most credit agreements allow for early repayments if you find yourself in the position to do so. Some providers, although allowing early repayments, may charge a fee. The terminology for this varies across providers, so be on the lookout for terms such as early repayment charge, early repayment penalty, early redemption fee, or similar when taking out a credit agreement.
Some people may choose to avoid credit lenders entirely, instead borrowing money from family and friends (twelve percent of people stated they plan to borrow in this way). This option can be good if you have someone in your life that can afford to lend you the money you need, however, with no credit checks or legal repayment plans in place, it can be much easier to find yourself in a position where you’re struggling to repay the loan. If you choose to borrow money in this way, ensure that both of you agree on a payment plan so that the person lending money can be confident that they’ll receive their money back in a timely manner, in order to avoid any disagreements or arguments.
Only borrow what you can afford
Credit is becoming widely available to most people, even for those with below-average credit scores. This means that many people are able to obtain credit as a quick solution to financial difficulty, however, taking out credit that you cannot afford in the long run can cause further problems down the line.
When looking for a new credit agreement, some providers may offer a much higher sum than you might have hoped. Although it can be very tempting to accept this higher amount, it’s important to only borrow within your means to ensure that you can afford the repayments without causing any further financial difficulty. Remember, you not only owe the total amount borrowed but interest on top of that too. It’s also worth noting that if you plan to take out more than one new form of credit, taking the maximum amount from one provider may limit what others will offer you.
Fifteen percent of people plan to borrow through Buy-Now-Pay-Later (BNPL) schemes. Many BNPL providers will not complete a credit check. This may seem like an easy way to secure credit, but this lack of a credit check can mean borrowers quickly accumulate large amounts of debt. If you choose to borrow through BNPL, only borrow what you need to ensure that you can keep up with all repayments.
Set up a direct debit in order to make sure all repayments arrive at the right place and at the right time, whether borrowing small or large amounts.
Support is available – seek it if you need it
Even when borrowing within your means and understanding the T&Cs, unexpected circumstances can happen, making it difficult to meet your repayments on time. The best course of action in these instances is to contact the credit provider as soon as possible to gain support – if they don’t know you are struggling, they can’t help you. Providers may be able to offer new, affordable ways to repay the credit that is more suited to your circumstances, such as extending the term (length of borrowing) in order to reduce the monthly amount or switching the product to make repayments more manageable.
Money-related stress has a direct impact on mental health, and in times of country-wide financial hardship, this can be amplified. If you’re struggling to pay your bills or have found yourself in a position of unmanageable debt, there are various sources of support available such as StepChange and Citizens Advice. Do not suffer in silence, gain support if you need it.
Jacqueline Dewey is CEO of Smart Money People, the UK’s dedicated financial services review site. All statistics are taken from a recent survey conducted by YouGov on behalf of Smart Money People.