Recently, the European Commission published its latest Winter Economic Forecasts, which point to GDP (Gross Domestic Product) growth trends across all EU Member States through to 2018. The EC press announcement was a refreshing read on an otherwise gloomy Monday morning.
However, reality soon struck with the realization that consumer indebtedness must be in part driving the growth. Can there be any doubt that many shoppers are feeling the pinch?
Households across the EU remain highly indebted and there is growing concern that rising levels of consumer debt are driving the world towards a new financial crisis.
So, who is going to take charge and get a handle on the situation?
The truth is that we all need to better educate ourselves financially. We should not get sucked into the latest “buy more than you need” sales temptation or interest-free credit products that only delay the inevitable need to pay.
Questions to ask when looking to borrow money.
The first question must be “Do I really need to borrow this money at all?”, and not “Where can I borrow from?”
If the answer is yes, then responsible borrowing is certainly one half of the story and responsible lending is the other.
When considering borrowing money, you need to ask yourself “Why do I really need to spend this money? Is it for a luxury, or a necessity?”
It’s a fact of life that most of us have to borrow money now and again. But, there is a difference between taking out an emergency loan for an unforeseen expense, such as an urgent visit by the plumber, and making a lifestyle choice to take out a loan to indulge in the latest fashion fad.
If it’s for a necessity, try looking for cheaper options first. If it were a luxury spend, would you be happier going without it but knowing you were closer to being debt free as a consequence? How long would it take to save up for it instead? Wouldn’t it be great to see yourself getting closer to that magical point when you can say “I can afford that now”?
Ultimately, borrowing is a two-sided process. The borrower has a responsibility to repay a loan in a timely fashion, and to be open with the lender if they are unable to do so.
The lender has a number of responsibilities. These include statutory responsibilities under law, but also, social and ethical responsibilities. These include transparent explanation of all charges and fees. They also need to explain what happens if the borrower isn’t able to fulfill the repayment plan agreed. The lender also has an ethical responsibility above and beyond the legal requirements.
In the past, some single payment lenders have fallen short of this and traditional lenders have got away with charging equally exorbitant overdraft charges, but with the acceptable face of a well-respected traditional establishment.
So, what’s the lesson?
Firstly, we have to take responsibility for our own borrowing, regardless of who we borrow from. Always read the contract before agreeing to a loan, and be prepared to have to pay additional charges if you miss repayments. It is when payments are missed, overdrafts are entered into, and charges amass that managing debt becomes more difficult.
If you need a loan, be it short or long term, choose a company that doesn’t hide behind small print, and remember, YOU are the customer.
So if you choose to take out a loan, be smart and consider the TRUE cost of borrowing.
Carefully consider the initial loan amount and the length of the borrowing term.
Can you afford to only be in debt for a couple of weeks rather than a couple of years? What about the frequency of repayments? Will you be paying back in little bits every week? Will you be expected to pay it all back in one go? Is there a big chunk to pay back at the end? Will there be times when you won’t find it so easy to make those repayments?
Another big factor is the interest rate you’ll be charged. This can get complicated, and you should ask your lender to be very clear. Some short term consumer lending companies appear to charge high interest rates on an annual basis, but in reality, because you’re only borrowing small amounts for just a few weeks, it can actually end up being quite cost effective compared to the more traditional high street branch routes that people are more used to.
Be aware of other charges. Some companies charge a set fee for ‘arranging’ the loan, as well as interest. Others will charge for late payments, or non-payments, or even early payments! Have a close look at the other charges your lender is making. Sometimes these can be much more than that interest, or even more than the loan amount itself!
So, before you take out your next loan, ask yourself if you need to. Then ask yourself if there’s better alternatives. If you still need to borrow, do a bit of shopping around, make sure you understand the TRUE costs of borrowing, and go for the smallest loan needed.
