How borrowing actually works

Borrowing is buying money, and interest is the price. Once you see it that way, most credit decisions become simple comparisons.

The four variables

Every loan, card and mortgage is built from the same four numbers: the principal you borrow, the interest rate, the term you repay over, and any fees. Change one and the others react.

The most misunderstood is the term. Stretching a loan from three years to five lowers the monthly payment - and increases the total interest, often substantially. Lenders advertise the monthly figure because it is the number that feels affordable. Always ask for the total amount repayable.

Secured versus unsecured

Secured debt is tied to an asset. Mortgages and car finance are secured, which is why their rates are lower - the lender can take the asset if you stop paying. Unsecured debt (cards, overdrafts, personal loans) has no asset behind it, so rates are higher and the consequences of missing payments are legal and credit-related rather than immediate repossession.

Never convert unsecured debt into secured debt casually. Consolidating cards into a loan against your home lowers the rate and raises the stakes.

The good, the neutral and the expensive

• Reasonable: borrowing for an appreciating or essential asset at a low rate - a home, sometimes education or a work vehicle.
• Neutral: a planned, affordable purchase at a modest rate over a short term.
• Expensive: revolving card balances, overdrafts, payday loans, and buy-now-pay-later stacked across several purchases. These are for genuine short-term gaps, not lifestyle.

The one question before borrowing

"Can I afford the repayment if my income drops or rates rise?" If the answer is no, the debt is not affordable - regardless of what the affordability check says.