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.