Types of borrowing

Before you apply for a credit card, store card, or increase the amount you can borrow on a card it makes sense to weigh up if you really need to. At times where people are facing rising bills and there is some economic uncertainty, many choose to try to pay back debts to reduce their outgoings in the future rather than borrow more. 

So before you take on debt you should consider:

Do you need to borrow money?

• For example, could you save and buy the item later or could you just do without it?

Should you use your savings instead?

• If the purchase is a necessity, for example, could you pay out of your savings that you can easily access and then repay back the savings instead of paying back the debt. The money you lose in interest may be less than the cost of a loan. But you need make sure there are no penalties if you take the money out.

Can you afford to borrow money?

• Consider your existing debts and bills. Weigh up how much you are already paying back and if you can afford more monthly repayments on top. Could you still afford to pay back if interest rates rise or your bills go up? Are your circumstances likely to change – for example a cut in your hours, maternity/paternity leave etc?

How will you pay it back?  

• You need to work out the total cost of your borrowing – not just the amount you borrow. Be aware of any extra charges or fees. All loans should tell you how much you will pay back overall, including any interest.  Usually the lower the interest the lower the cost – but remember the fees. Generally speaking, the longer period of time you pay back the loan over the more it will cost.  To see what is affordable you should draw up a budget. Then check if you can afford the monthly repayments. You might want to consider different loan options and compare the true cost between them.

Should you borrow from family or friends?

• Only you can know the answer to this. It can work well if a family member or friend can help you avoid borrowing money with a very high rate of interest – such as a payday loan – in an emergency and the money is paid back. But both parties should consider what would happen to the relationship if the debt was never paid back as it could potentially harm the relationship.

If you do need to borrow what is the most appropriate way to borrow?

• Each type of borrowing has different pros and cons and might be more appropriate for different time scales. So you need to weigh up which is the most cost-effective and suitable way to borrow to meet your needs.

What’s the difference between good debt and bad debt?

Good debt is generally a good investment in your future, for example getting a mortgage to buy a house. It should leave you better off in the long term and won’t have a negative impact on your financial circumstances. 

You are likely to have a specific reason for taking on the debt and a clear plan for paying it back. You will have checked that you are getting the best deal that you can – so a low interest rate with a term and charges that are appropriate for your needs, and avoiding penalties if you pay it off early if you can afford to. Examples of good debts are mortgages, student loans or investing in your business.

Bad debt is unaffordable debt, which is unlikely to be of long-term value to you – for example impulse purchases on a store card for items you don’t really need. Borrowing money to pay everyday bills is also not a good idea. If you can’t afford to make your repayments regularly that is also bad debt.

Examples of bad debt could be a luxury holiday you can’t afford or a brand new car that you don’t really need.

To avoid bad debt ask yourself:

• Do I really need to borrow the money?
• Have I shopped around for the best deal?
• Can I afford the repayments comfortably for the length of the term?
• Will borrowing this money help my finances in the long term?
• Have I thought through what could go wrong and do I understand all the risks?

We are a responsible bank, and we want to make sure you can afford to repay what you borrow. We want to understand your personal circumstances so that we don’t lend you an amount that you would struggle to pay back.

If debt is a problem for you, then you can get free confidential advice and help.

Our responsibilities

At Metro Bank we are committed to lending in a responsible way. Treating customers fairly is at the heart of our organisation and this means designing products that give you value, understanding your needs, ensuring the way we do business with you is transparent and generally helping you to make informed choices.

Before we lend you money or increase your overdraft we like to be certain you can afford to repay it, meaning you're always in control of your money. For a loan that means we want to make sure you can afford your borrowing over the whole term of the loan.

If you can foresee changes in your circumstances that may increase your outgoings or reduce your disposable income then please give us a call or visit one of our stores.

Changes to consider are:

• Employment situation changes – for example, imminent retirement, maternity or paternity or extended leave
• Reduction in working hours – like fixed contract end dates or zero hour contracts
• Increase in living costs – e.g. rent or mortgage repayment increases.

Deciding what's best is a tricky business, so we look at many pieces of information and use a variety of techniques to help us make the right decision. That means things like affordability, credit scoring, credit reference agency information and your history with us.

We have real people using their judgement, experience and skill to make a genuine assessment of your ability to repay.

If we decide not to lend money to you, it will usually be because we are trying to protect your financial health or it is too risky.

Your responsibilities

We have responsibilities when lending money and you do too. Before you ask to borrow money or increase your overdraft, it's worth thinking about your own circumstances.

• Can you afford to repay the borrowing?
• What happens if your lifestyle changes and you find yourself with less income or more costs?
• How will you cope if interest rates increase?

Always bear in mind the potential risks and the long-term damage it might do to your financial health.