If you are considering borrowing some money, then it is really important to make sure that you borrow the right amount. There are consequences of borrowing too much and too little and so you need to make sure that you are borrowing just the right amount. Unfortunately there is no formula as to how to work out what the right amount is. You will just need to think about your own personal circumstances and work out what is best for you.
There are two main areas which you need to look at when considering how much money to borrow. You need to think about why you are borrowing money and how much you need to cover the cost of the items you want to buy. You also need to think about the cost of the repayments and whether you will be able to afford them. This may seem quite straightforward, but these will be explained in more detail below so you can see why they may not be as simple as they seem.
Usually when we want to borrow money we will have a specific item that we wish to buy. It might be something very expensive such as a house or a car or something cheaper like a fridge or an electric bill. The type of lending we choose will partly be dependent on the amount of money that we need to borrow. All borrowing costs money though, always in interest but there may be other fees and costs as well. The more money you borrow, the higher the total cost of the borrowing is likely to be.
This is why it can be wise to make sure that you borrow the minimum amount that you can. If you have savings it can be good to consider whether to use these, either instead of a loan or as well as a loan to allow you to borrow less. Although savings do pay some interest, a loan will normally be more expensive. Therefore it usually makes financial sense to use your savings first rather than just going for a loan immediately. You may still need to think about how much to borrow though.
It can often be tempting to borrow a little bit more than you need. This can be because you want a bit extra just in case or you feel you could buy a little bit more if you have that extra money. If this is the case, then work out how much extra you will end up paying in interest for that extra money and that should give you enough information to decide whether you think that it is worth paying that extra. Of course, you do need to get the balance right as if you do not borrow enough and you have used your savings as well, you may find yourself in trouble if you do need some extra money. However, if you have a credit card or overdraft, then you do have these as a backup if necessary.
Deciding how much you think you need to borrow is just one part of the decision. You also need to make sure that you can repay what you owe. Loans tend to have a repayment schedule where you will need to pay back a certain amount each month. It is important to make sure that you are confident that you will be able to afford to make those repayments each month. If you can make the repayments now, that is great but do not forget to think about the future as well. You may not be able to manage so well as you can now, so think about what you think might happen during the term of the loan and whether you think you will be able to always manage the repayments. It can be hard to predict but think about things such as your job security, borrowing and spending you may need to do in the future and things like this. You should be able to have some idea as to what may happen. The longer the term, the harder it is to predict, but if you can at least think about the next few years, that will be helpful.