- 04
- Jun
Whilst borrowing is a great way of letting you spend money when you don’t have any it is also a lot more than that. Each time you borrow money from a lender what you are really doing is giving up all or some of your future income.
For instance, suppose you take out a personal loan of £2,500 at 12% interest to repay over 36 months, what you are agreeing to with your lender is that you are going to repay £94 of your monthly income for the next three years. However you are also paying for the privilege of getting the money right away. You pay for the privilege in interest repayments and in this case you will be paying an additional £900 back to your lender in interest.
Never be fooled into thinking that your lender actually wants you to pay off your loan as quickly as possible. That is why most lenders set very low minimum repayment rates, This way it ensures that most of what you are repaying to the lender is interest and not actually the money you borrowed. This can substantially increase the length of the loan from the lender at your expense while they make large extra profits. Lenders like nothing better than having customers in the minimum payment trap.
However, lenders are also more likely to offer you a better rate of interest if you take out a large loan over a longer period, so a long-term deal is not necessarily a bad one.
The wisest idea when getting loan quotes is to ask the lender what your total repayment will be over the period. This way you can compare deals and see just how much interest you will be paying back over time.
