Can you afford this credit?
Just because you've been offered it, that doesn't mean you can afford it.
If you're stretched to the limit by credit repayments, i.e. your debts, it's still common to be offered more credit cards or loans. You're the person most likely to be targeted by the credit industry, and also the person who should avoid it the most.
Where do I start?
It's easy to get confused by the small print on credit agreements, and often we get embarrassed to admit we don't know how the maths works. One easy rule of thumb is to look at both the APR and the time that the loan is spread over.
APR
The APR, or the annual percentage rate, takes into account that you're making monthly repayments, rather than paying it back in one lump sum. This method of repayment means that you're paying interest on what you borrowed, and interest on the interest. If you don't know what the APR will be for this credit, be sure to ask.
APRs are a good way of comparing credit cards, unsecured personal loans, and overdrafts. They aren't so good for comparing mortgages, because interest can be calculated in several different ways for these.
Length of loan
If you're spreading repayments over several years, rather than paying it back quickly, it will cost you lots more, unless it's a very low APR.
Monthly repayments
If you're happy with the APR and length of loan, can you manage the repayments? Look at how much of your take-home pay they will eat up. Ten per cent of your income might sound manageable, but think very hard about how it will affect your lifestyle. Ask the lender how much you will be expected to pay each month.
Do you have other loans as well? Be very careful not to over-stretch your finances. It's common to assume that you'll be earning more in a year's time, but don't rely on this, just go with what you can realistically afford now.
Useful little calculator:
This calculator allows you to look at APRs or flat interest rates. It'll give you the amount you need to repay monthly, and lets you know how much the borrowing will set you back on top of this too.
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