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How to Determine if You Can Afford to Borrow Money

For most people today, borrowing money can be difficult to avoid – whether you’re taking out a loan to fund a large purchase like a new car, getting a mortgage for a new home, applying for a credit card, or getting short-term credit to cover an emergency expense. If you think that you need to borrow, it’s important that you are sure you can afford any new monthly repayments. Knowing exactly what amount of money is coming in and going out of your account each month will help you determine whether or not extra credit is affordable for you.

Draw up a budget:

Whether you’re looking to get a large loan to fund a high value purchase or payday loans to cover an unexpected expense, the best way you can see whether or not you can afford to take on new credit is to create a household budget. Include all your income and every expense that you pay for each month – this will show you if you have any money left at the end of the month once you’ve paid your priority bills and living expenses that you could use to repay the loan. And, you could also take this opportunity to determine if there are some expenses that you could cut out such as gym memberships that you don’t use anymore, for example. 

Shop around:

Don’t just go with the first lender that you find – shopping around for a loan, credit card, short-term loan or another kind of finance is just as important as shopping around for home utilities and anything else. Comparison sites are a great way to find out if you are going to be getting the best deals, and many offer credit eligibility checks, allowing you to determine which loans, credit cards and other types of finance you are likely to be accepted for without affecting your credit rating. 

Consider your circumstances:

Before you go ahead and apply for finance, you should always take your personal circumstances into consideration first. For example, if your current job is on a six month contract and you want a loan that would take you a year or more to pay back, now is probably not the best time to consider borrowing, as you can’t be sure that you’ll still be in the same financial position a few months from now. 

If you’re just making ends meet:

If after reviewing your budget and your personal circumstances you find that you have little to no spare funds left over to repay any extra debt each month, then you’re not in a position where you can afford to borrow. But, don’t ignore the problem – if it’s due to debts that you are currently repaying, work out a plan to repay some of them in full before you consider borrowing any more. And, bear in mind that repaying debts will free up extra money for you each month, so you may find that the need to borrow diminishes. The snowball method of repaying debt might work well for you. 

If you found this post helpful, we’d love to hear from you in the comments.

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