Tip 3: Understanding your borrowing options
At 18 you’re legally allowed to borrow, so you’ll find lots of companies trying to tempt you with offers. This includes the use of your overdraft. But there are other borrowing options out there, many of them with less generous interest free options – such as credit cards, loans or finance options. This means when you borrow money, you have to pay more money back.
Before deciding to borrow, you need to understand your options, and what the consequences of borrowing will be.
APR is a charge for borrowing, the interest paid on credit so it will be added to the amount of money you borrow. You want this to be as low as possible so you pay as little as possible back. The average APR for credit cards is around 20% meaning if you borrow £1000 at 20% APR and don’t pay it back for a year you would owe £1200.
Everyone likes having new clothes, going out with friends and taking holidays but it’s important to think about whether you can actually afford to allow yourself to have all the fun. You want to enjoy your uni experience, but don’t lumber yourself with a lot of debt for things that are fun, but non-essential.
It is easy to borrow and spend money but it can be much harder to pay it back. Don’t borrow more than you can afford to pay back. You’ve borrowed money since things are tight – so what is a realistic payback scheme? Can you pay back each month? If you get goods – such as a laptop or TV, can you keep those payments up?
If you turn to credit cards – try and pay back more than the minimum each month. It will save you years of debt! If you have a credit card with an average APR (20%) and pay back the minimum, it will take you over 16 years to pay back the debt! Double that minimum each month and that could shoot down to less than two years. If you’re tempted by a credit card, use this handy repayment calculator to work out the best deal for you.
Buy now and pay later, known as ‘on finance’, can be super tempting. Typically, a set period of time is agreed to pay the item off but since it is a type of loan, APR may be charged on top of the price of the item. Be wary, as buying too many things in this way, it could lead to unmanageable debt. Also, keep in mind the reason Klarna (the instalment paying programme) is so popular with retailers – shoppers spend an average of 68% more when using this on finance option.