Should I be Scared of Getting into Debt if Rates are High?

If interest rates are high then it is not surprising that people are more wary of borrowing money. When the rates are high, borrowing will be more expensive and this could lead to repayments being higher and the total cost of the loan being higher as well. However, although rates may be high and loans expensive, it does not always mean that you should avoid borrowing.

What sorts of borrowing to avoid

Often debt is split into good and bad debt, with bad debt being the type that should be avoided. This can make it easier to understand that there is some debt that is okay and so we should not always be scared of it, but it is not always easy to know which type of debt you might have. This is because it depends on your situation. It is not possible to just say certain types of loan are good and others are bad, but it depends on what you are using the money for.

If you are borrowing for an emergency and have no other way of getting the money to pay a bill or buy food, this might be considered to be good debt. If you are borrowing to buy something that will improve your financial position in the future and you could not otherwise afford to buy, this could also be considered to be good debt. But there is a second factor as well.

You need to check that you will be able to afford to repay the debt. This could mean that you will need to compare lenders until you find one that has repayments that you can afford. Comparing lenders is always wise as you want to find the loan that offers the best value for money for you.  If you struggle to find one that you can afford, then you may need to think of a way that you will be able to change the items you are buying so that you can afford the repayments or you may even need to think of ways that you can earn more money.

So, you need to avoid loans which do not have a good purpose and that you cannot afford to repay.

What sorts of borrowing to consider

If rates are high, then you may feel that you should avid all borrowing. If you can avoid borrowing, then it will be cheaper and so if the things that you are considering buying are not necessary, then it might be wise to avoid getting them anyway. However, when it comes to buying things like university courses or houses then you may have to borrow money in order to afford them. These are usually considered good loans because they should help you to improve your situation financially in the long term and most people would not be able to afford the items without a loan.

You may feel though, that if rates are high, that you will not be wise to get them. However, this is a tricky decision. If rates are high, odds are that they might fall and so the loan may start to get cheaper. Also, the loans are long term both potentially lasting for thirty years and rates will fluctuate a lot in this time and so them starting high will not necessarily have any bearing on how things will continue in the future. Comparing loans and their rates can help you to keep rates down as well, as you will find that they will vary. If you check every so often, to see how your lender compares and switch to a cheaper one, then you will be able to keep your loan as cheap as possible.

Some borrowers will look at getting a fixed rate loan to help them to manage if rates go up even more. These will often be foxed for a certain period of time and they can often be at a rate slightly higher than the variable rate. The idea is that you will know exactly how much you will be expected to repay each month and therefore if the rate goes up you will be protected form that. Of course, there is always a risk that the rate may fall and you will not benefit from that. This can be a good idea if you feel that you will struggle to manage if the rate is any higher than it is at the moment.

So, whether rates are high or low, you should always be cautious when you are borrowing. Ensure that you are borrowing for a good purpose and that the loan you choose is right for you and competitive. By comparing prices you will be able to make sure that not be paying more than necessary but the cheapest may not be with the best lender so make sure that you are comparing value for money.