We can often struggle to pay our regular bills and it can be tempting to borrow money in order to help. Costs can seem to go up and we might also look for ways to keep them down. When we take out insurance, for example, it can be tempting to borrow to pay for it in a lump sum as it can be cheaper than paying monthly. This is a decision worth thinking hard about though as it may not always be beneficial.
To start with it is really important to be aware of the cost of both. With insurance, such as house insurance or car insurance, it is often significantly cheaper if you pay it yearly in a lump sum, compared to paying it monthly. As insurance is so expensive, it is wise to start by comparing costs and finding the one that offers you the best value for money, this could reduce the costs anyway.
Then you need to see whether you can afford the lump sum without having to borrow money. You might have some savings that you could use, for example. Using savings can be tricky as we might want them in case of an emergency or are saving up for something specific. However, if we can save a significant amount of money by using them rather than borrowing it can be worth it.
If you do not have the money, then you might consider borrowing to pay it. You might use a credit card, overdraft or other type of loan. This may seem like a good idea as it means that you can get the insurance for less. However, it may end up costing you more money. Look into the cost of the loan and calculate whether you will be paying more by borrowing the money compared with paying the insurance monthly. Paying monthly might be dearer than making a lump sum payment but the cost of a loan might be even more expensive. If the loan has regular repayments then it should be fairly easy to calculate the cost of it or you could ask the lender. However, if you are using a credit card, then the cost will depend on how quickly you decide to pay it back and the same can be true of an overdraft. Come up with your own repayment schedule for them and see how it compares. Do make sure you are committed to those repayments if you decide to use this route.
Consider credit record
It is also wise to consider your credit record. Although taking out insurance and paying monthly will show up on your credit record, it will be different to a loan. As long as you make the repayments on both it will be in your favour, but it may not look good still that you have taken out a loan. This might depend on how many other loans you have though as if you already have some then it may just add up to be too many for a lender to consider giving you more. It may also depend on whether you will need to rely on a good credit record for the future.
Think about future borrowing
Therefore it is wise to think about whether you might need to borrow money in the future and whether having a loan now might make it harder for you to borrow. If you are confident that you can pay the loan back quickly, then this could be better, but still be wary as things do not always turn out as we expect and sometimes we just cannot pay things back as we expect.
As well as impacting your credit record and meaning that you may have a lower chance of being accepted for a loan, you may struggle with managing the repayments on an additional loan. It is likely that you will have to make regular repayments and if you do not manage to make these, then you will get into a lot of financial trouble with fees and charges to pay and your credit record being affected. Therefore make sure that you are not taking on more than you can manage. Also make sure that you take into consideration that interest rates may go up in the future. This could mean that you will need to be paying back even more each month and you need to be confident that this is something that you will be able to manage. Think about how well you think you could manage now and whether an increase in interest rates could be enough to make the repayments unmanageable. It is hard to predict what might happen but if you are prepared for the worst then this will allow you to have a plan just in case.