UK residents now carry a record-setting debt load of 15,000 pounds – and being weighed down with debt is clearly not desirable. But borrowing is sometimes necessary and can be a convenient and effective tool to get you out of a tight spot and back on your financial feet again. There are two keys to using debt wisely: timing and quantity.
Given that you will only seek a loan when you really need one, fully intend to repay, and have the income to do so in a reasonable amount of time, the question to ponder is how much you can afford to take out.
You can use the online loan calculator and other resources at simplepersonalloans.co.uk to toy around with the possibilities, but when faced with the need for a short term personal loan, you should also consider these 3 parameters in deciding how much debt you can handle:
1. Measure Your Debt-to-income Ratio
If you will be taking out a loan for a year or longer, then you will want to compare the debt principal to your annual income. A load of 15% is considered by most analysts to be very affordable and not a problem.
If you have fewer bills to worry about and a little money saved, you might be able to go 20%.
Between 20% and 40%, you should think about reducing your debt loan, while anything at 40%, 50%, or higher could spell bankruptcy.
For loans that will last less than 6 months, you should probably also look at what percentage of your monthly income will be spent on repayments. Again, the 15% to 20% range is considered acceptable and will be approved by most short term lenders.
2. How Much Debt Are You Comfortable With?
You have to consider your comfort level with debt and not just the raw stats and numbers. After all, you don’t want to overstress needlessly.
If you can consider the installments on your personal loan as equivalent to a “bill” and pay them off responsibly without feeling financially “claustrophobic,” fine. Otherwise, think about taking out a smaller and shorter personal or payday loan you will be comfortable with.
Everyone’s comfort zone is different here. What you need to do is picture yourself in the situation you would be in, maybe comparing it to past situations you have experienced, and think through how you would react.
3. Compare The Cost To The Potential Rewards
Another factor in deciding if debt is worth it is considering the value of what you hope to gain by using it. If it’s a matter of utter necessity, like a medical emergency, necessary home repair, or a transmission job on your only means of transportation – the consequences of NOT taking out the loan would outweigh any risks in doing so.
If your loan is going to get you a new car faster so you or your son/daughter can drive to college, buy you that new fishing boat before the on season is over, or meet a pressing business need, again, it could be worthwhile up to thousands of pounds as a principal and a year or more long term.
For an unnecessary perk you could afford in a few months anyway if you save, and that you suffer no major harm for the lack of in the meantime, avoid a loan. But for anything substantial and that is time sensitive, it can make sense to seek financing.
These three key principles will help you decipher how much debt is acceptable and when and why to accept it or not to do so. Wise financial management may mean managing debt, not always avoiding it.
