Think twice before borrowing your way out of money trouble

Loans have often been seen as a quick fix but used wrongly can make a small problem worse

- By LARA OWEN

AS THE UK experiences a cost-of-living squeeze, it’s never been more tempting to borrow. Loans can smooth out big life purchases and spread the cost of essentials, but they can just as easily deepen money worries if they're taken on for the wrong reasons or without a realistic plan to repay them. So, when does borrowing make sense? And when should you step back?

WHEN A LOAN CAN BE THE RIGHT FINANCIAL TOOL

Loans aren't inherently bad, explains chartered tax adviser and private client consultant at St. James's Place, Obi Nnochiri, who also says the key is what you use them for.

“Taking out a loan can make financial sense when it is used to fund something that provides long-term value or improves financial resilience,” he said, “such as buying a home, investing in education, consolidating expensive existing debt or covering a short-term cashflow gap with a clear repayment plan.”

Nnochiri’s last point is crucial. A loan should support stability - not postpone a financial crisis.

‘Money Wellness’ external relations director Sebrina McCullough said a loan “can make sense if it genuinely improves your situation in the long run. Where people often come unstuck is borrowing to plug a gap that's really about ongoing affordability”.