FOOL'S EYE VIEW
How To Borrow Sensibly

By Jane Mack (TMFJane)
October 5, 2004

Last week, there was a very sad story in the newspapers about a forklift-truck driver who hanged himself after running up debts of more than £100,000 over a period of fifteen years.

The poor man's debt problems began when his marriage broke down and things just spiralled out of control from there. At last week's inquest, the coroner said it was "extraordinary" that he had been able to accumulate such a huge debt without alarm bells ringing among the lenders involved.

He wasn't even a homeowner and yet had managed to acquire sixteen credit cards over more than a decade. Apparently, the reason was because he had always managed to make his minimum monthly repayments and, therefore, his credit reference file showed that he was a good payer.

While I agree with the coroner that the financial services industry needs to learn a few lessons about responsible lending, I would suggest that, ultimately, it is still the consumer who has to sign on the dotted line whenever s/he wants to borrow money. In other words, perhaps we should think about our own responsibilities a little more when we agree that, in return for borrowing a lump sum to spend as we choose, we will pay back that lump sum with interest.

I sympathise hugely with the man who died, but I'm still trying to figure out, with the limited information available, where he went wrong. Because he must have gone wrong somewhere down the line!

Not only do people need to think carefully before borrowing or buying on credit, they also need to seek good, impartial advice when they are struggling with debt. There's simply no point in robbing Peter to pay Paul, because it doesn't achieve anything, as this man discovered at great cost.

Most people don't get into nearly as much trouble as he did but, sometimes, we borrow enough to make it difficult to sleep easily at night. So, here are six things to think about if you're planning to borrow money:

Can you really afford it?

It's a sensible question, of course, and one that people should consider more seriously. Often, we only think about short-term affordability. We may feel that that we can make repayments this month and next month and the month after, but how sure are we that we'll still be in a position to do so this time next year? We assume we're not going to lose our jobs, fall ill, or get divorced, and that nothing will stop us from being able to repay what we've borrowed. Besides, we obviously want that new kitchen or holiday or car now, so we go for it anyway. Is it the right decision, though?

Shop around for the best deal

It's shocking how frequently that old chestnut – inertia – surfaces. It's true that some people have credit ratings that aren't good enough to get cheaper deals but, for the most part, many of us are paying more than we need to in interest charges simply because we're too lazy to shop around. Puhleeze, don't make that mistake!

Read the small print beforesigning

Aaaargh! We can't think of anything more tedious than trying to decipher the small print, but it has to be done. If something's not clear, ask! How many people do you know who see the error of their ways, try to switch to better deals, only to discover that they've got to stump up a hefty redemption penalty? Don't be one of them - read the details before you sign in the first place.

Check how much you'll pay back over the length of the loan

This is another thing people often ignore. If you borrow £1,000 on instant credit at an APR of 25% over five years, you'll pay £675 in interest for the privilege. How much do you really want that widescreen TV? Do you really need it right now, or could you save up for it? What's so wrong with your current television set, anyway?

Watch out for optional extras, especially payment protection insurance (PPI)

This is a particular favourite with lenders. Often, their application forms require us to tick a box if we don't want payment protection insurance. Since many of us don't bother to read the small print, it's possible to get lumbered with paying extra for something that we probably don't even need. You don't need PPI or won't be covered fully if you're: self-employed, on a short-term contract, have savings that could cover the monthly repayments temporarily, or have any other income protection policy.

Beware of loans secured on your home – you could lose it!

Sometimes, there are good reasons for releasing some of the equity in your home, but you need to think long and hard about borrowing money against the roof over your head. If it's for something that will add value, such as a new kitchen or a loft conversion, then a secured loan or bigger mortgage may be worth considering. But are you sure that you want to risk your home, just so you can enjoy a luxury holiday that you'll barely remember by the time you've paid off the loan at the end of the mortgage term?

And finally...

If you're intending to borrow money, make sure you do it for the right reasons  - and think about the tips above. Don't overextend yourself and, if you think you may already have, contact the Consumer Credit Counselling Service or Payplan, which will help you to sort out your finances for free. (Avoid debt-management companies that charge fees- you're wasting your money).

By all accounts, the man who killed himself because of his debts lived very simply indeed. After fifteen years of struggling to pay back what he'd borrowed, he had to live frugally in order to be able to meet his minimum repayments each month. Perhaps his biggest mistake wasn't that he fell foul of today's credit-card culture, it was that he didn't seek help when his debts got out of hand.

Actually, scratch that rather trite observation above. His biggest mistake was in killing himself. He owed his creditors some money, not his life.

More: Get help in our Get Out Of Debt centre and Dealing With Debt discussion board | When Debts Turn Nasty.