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23rd May, 2022

7 pitfalls to avoid if you’re thinking about borrowing money

Rugby Editorial 29th Apr, 2022

Contemplating taking out a loan? Make sure you do some prep first, says Vicky Shaw.

Borrowing money is something many households may consider over the coming months, as bills and prices continue to rise.

The decision to take out a loan requires careful thought and consideration, however.

Whether the money is for a car, home improvements or a special event, it’s important to be sure any borrowing you do will suit your needs – now and longer term.

If you’re thinking about taking out a loan, here are seven pitfalls to avoid…

1. Initiating too many ‘hard’ credit searches when searching for a loan

A hard credit check happens when a company makes a thorough search of your credit report. Other companies making searches will also be able to see if you’ve applied for credit. This could impact the ability to get a loan if many applications have been made within a short timeframe.

But soft searches can also be carried out, without impacting your credit file. These can indicate whether you might be approved, without hitting your credit score. MoneySavingExpert.com has a ‘loans eligibility calculator’ on their website.

2. Spiralling into further debts

Households are under multiple pressures from a string of bill hikes, and a recent survey from pensions and retirement specialist LV= suggested 8% of people are taking on more debt to cope with rising bills.

If you’re considering borrowing more money simply to get by day-to-day, you could risk making your overall financial situation worse by getting into a downward debt spiral.

Charities such as StepChange, the Money Advice Trust and Citizens Advice can help with problem debts – there might be a number of things they can suggest to help you manage.

3. Not working out exactly how much you need to borrow

Paul Went, managing director at Shawbrook Bank Personal Loans, suggests working out exactly how much you need. That way you won’t be borrowing – and paying interest on – more than is necessary.

Photo of Paul Went from Shawbrook Bank. Picture credit: Shawbrook Bank/PA.

“It will also enable you to work with your financial lender to decide which type of loan or credit will be most suitable,” adds Went.

“Some financial lenders will ask you for a purpose before you enter into an agreement, so make sure you have a firm understanding of how the money will be used.”

Lenders may offer lower rates for people borrowing over certain amounts of money, or thresholds. But it’s important not to over-stretch yourself and there may be other ways to access a lower rate, for example by improving your credit score and comparing deals.

4. Not considering ways to keep the cost down

As well as the loan amount, you will want to consider how long you will need to pay the money back.

Paying back the money over a longer period in smaller monthly chunks may be more affordable, but it may also mean you pay more in interest over the long term. If you can afford to, you could also see if you could make overpayments on your loan to bring the costs down.

There may be other ways that people can minimise their costs, for example by using a 0% interest credit card. It may be worth putting a note in the diary to mark when the zero interest period ends, to make sure you don’t get stung by interest charges.

Went says:

“Our research showed that only a third (29%) of borrowing Brits actually do their homework on a lender before taking out a loan with them, while just two-fifths (41%) spend time shopping around to get a good deal when applying for a loan.”

5. Not thinking about whether the monthly repayments will fit into your budget

With living costs rising rapidly, you may need to consider how you would cope with this on top of any additional loan repayments.

The UK Government-backed Money Helper website has a free ‘budget planner’ tool on their website (moneyhelper.org.uk), which may be a helpful starting point.

Went adds:

“Our latest research showed that only two-fifths (41%) work out their budget before borrowing money, which is essential to make sure you can afford the repayments each month.”

6. Relying on the advertised APR (annual percentage rate) as a guarantee of what you’ll get

A lender may be advertising a “representative APR” that looks like a good interest rate, but they only have to offer this to just over half of applicants.

If your credit score isn’t top notch, perhaps you may still find you’re approved for the loan, but you may be charged a higher interest rate.

“Make sure you know what you’re being offered before agreeing to anything,” says Went.

7. Finally, don’t get caught out by the small print

Went says it is crucial to make sure you understand the full terms of the credit agreement, adding:

“It outlines the details of the loan, including the loan amount and the cost of borrowing, when the payments are due, your right to withdraw and any conditions for early repayments.”


To get advice online or find your local Citizens Advice, visit www.citizensadvice.org.uk or call the Citizens Advice consumer service on 0808 223 1133.

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