Does Borrowing Money When Interest Rates are High Put me at Risk?

Borrowing is something that we should all do very carefully. It is a big responsibility as you will have to repay the loan and this could be something that you might have to do over a long period of time. You will have to find money every month to repay the loan and therefore you need to make sure that you will have this money available.  There are big benefits to borrowing, such as being able to purchase things we would otherwise not be able to afford, such as a house. However, if interest rates are high it may put us off borrowing, but should we be worried that it will put us at risk?

The risks of borrowing

There are risks when we borrow money and it is important to make sure that we protect ourselves the best way that we can. The main risks are that we will find that we cannot afford the repayments and therefore have extra charges to pay and struggle financially as a result of this. This is always a risk, but there are things that we can do to lower that risk.

It is really important when taking out any loan that we find out how much we are expected to repay each month. Then we can look at our personal finances and see whether that is something that we can afford. It is important to do this really carefully, you want to be really confident that you will be able to afford it. If you do not think that you will then you need to forget the idea of the loan or come up with a plan of spending less and/or earning more which you will have to stick to or else you risk not being able to pay.

The effect of interest rates on risk

Our ability to repay a loan can change if the interest rates rise. This is because the amount we have to pay each month will go up because of the increase in interest that we will be paying. This means that we will need to find more money and there is an increased risk that we may not be able to manage the repayments. If interest rates are high then our repayments will be higher.

If the rates are high when we take out the loan and we are confident that we can repay it, then this might not be a huge risk. Although there is always a chance that rates will rise, they are more likely to fall, if they are high. This means that the repayments may get cheaper as the interest part reduces and this could mean that the risk is not too great. However, it is wise to still make sure that we would be able to continue to repay if the rates went up a bit as it is impossible to predict what might happen.

If the rates are low, then we may be taking on more of a risk because we may find that the rates are more likely to rise. If we are finding repayment easy, then a rise in rates may be affordable, however, if we are already struggling then it could cause problems for us.

The borrowing decision

As rates are very difficult to predict then it is always wise to assume that they might go up. Then you can check to see if you will still be able to afford to repay your loan even if the repayments are higher. If you think you will struggle to make the repayments anyway, then it could be a big risk to take out the loan as you may find that rates go up and you cannot pay for it. It is very wise to therefore be very careful when you are making your decision. If you think you will struggle with repayments, particularly if rates go up, then see if there is anything you can do to help. It might be that you will be able to cut down spending in certain areas. Perhaps you buy things that you do not really need or you could go to cheaper places to buy things. If this is the case then note down your ideas and approximate how much you might be able to generate by doing this. You might feel that you could earn more if you needed to. Again, you will need to come up with a plan on how you will do this and note it down. Make sure that you have your ideas available so if you need to fall back on them you will know where they are. Although all loans are a risk, as long as you have a plan to put into place, which you are confident in, if rates go up, then you will not be taking unnecessary risks.

Should I get a Personal Loan for my Business if the Interest Rate is Lower than a Business Loan?

If you have a business then you might be in a situation where you need to borrow some money. Having a look at your loan options you may find that you will be able to borrow money more cheaply if you take out a personal loan compared with a business loan. In some cases this might be a sensible idea but in other cases it may not be. It is wise to think very carefully before doing this.

About business loans

A business loan is specifically designed to lend money to a business. This means that if you want a business loan you will have to submit a business plan and show the lender that you will be capable of making the repayments. If you cannot impress them with your figures then you may not have the opportunity to have a business loan anyway.

If you have a limited company, then any borrowing that you do on behalf of the business through a business loan will be the responsibility of the company. This means that if you get into trouble with repaying it will be the business that is responsible and not you personally. This is important because it means that if you have a house, vehicle and other possessions, these cannot be taken from you in order to repay the business loan. However, as a director of the company, any arrears on business loans will be reflected on your credit report. If the business is not limited, perhaps a sole trader or partnership then you will not be able to limit the loan. This means that you will be personally responsible for any repayments anyway. Therefore, if you are getting a loan it will not make any difference whether it is a personal loan or business loan.

Taking a personal loan

A personal loan may need to be secured against a property or something like that. You will be personally responsible for making the repayments. It is really important to make sure that you find a loan which is not too expensive but which also has repayments that you can afford. You need to think about how well you think the business will do in the future in order to calculate how much you will be able to afford to repay. It can also be very wise to imagine what might happen if the business is no making enough to make the repayments and whether it is something that you will be able to afford to manage. You will still have to make the loan repayments and pay all of your normal bills and expenses and you need to think whether this will be something that you will be able to afford to do.

Borrowing for your business

It is really wise to think hard about any sort f borrowing including borrowing for your business. Sometimes, business borrowing can feel easier because the business is liable and not you, although if you take a personal loan then it will be you that is liable. However, there is always stress involved in running a business and adding to it by getting a loan can make things worse. It is well worth thinking hard about the purpose of the loan and deciding whether you really need it. Think about whether you will really benefit as a business. Sometimes using loans to expand or things like this, will mean that although your income goes up your costs do as well. It is worth focussing on profits and thinking about whether the loan has a real potential to increase them because if it does not, then it could be worth forgetting about. It can be a hard decision to make, so discuss it with lots of other people first. It can be hard doing this as you are probably passionate about your business and where you see it heading and you may be hit with negativity. This might be realistic though because those that do not share your passion may be able to see exactly what a risk you are taking and what little potential your idea has. The more opinions you get, the more likely you are to be able to get a real picture of what is likely to happen and whether you loan is a good idea. IT might be that you should forget the idea altogether, that you should delay for a while or that you should do something on a smaller scale and borrow less money. There are different possibilities and you need to think all of them through really carefully so that you are sure that you are doing the right thing for you and your business.

So, taking out a personal loan for your business is very risky and so even if the interest rate is lower, you need to think very carefully about the consequences of doing so for your own personal finances.