“Spend now and pay later” is alive and well

Many of us are still spending now and paying for it later, according to a survey by Fool.co.uk.

The spring months of April, May and June are the most likely times that we borrow money in readiness for a summer splash out. But it may be several winters later before the debt is eventually repaid.

Four out of ten people took out loans to consolidate existing debt
The average loan amount is £7,000 and repaid over three years
Four out of ten people borrow money for a big purchase
Three out of seven borrowers say they will take out another loan

The survey reveals that it is not always buying essentials that drives us into debt. One in eight people borrow money for lavish weddings, and a similar number have gone into debt to buy holiday homes. Others have taken out loans to buy horses, musical instruments, pay for cosmetic dentistry, and one person even owned up to frittering away his loan on “wine and women”!

Four out of ten people took out loans to consolidate their debts. These borrowers reckon they will pay off their debts in about 41 months, but on average it takes 38 months to clear a loan.

People who borrowed money for holidays believe it may take at least six months to repay the debt, which is probably longer than most suntans will last. But those who took out loans to buy cars are in for a long ride. They reckon it will be three years before they make the final payment on their run-around.

The good news is that a third of readers have paid off their loans, and in the main we are not so happy-go-lucky that we don’t want to avoid borrowing. Six out of ten people are determined not to take out another loan, but a quarter thought they could “never say never!”

David Kuo, Head of Personal Finance at Fool.co.uk, says: “It is always a good idea to consider alternatives before taking out a loan. If you have some savings, then dipping into your nest egg is likely to cost less than borrowing money, even if it is a low-cost loan.

“Additionally, delaying your purchase and putting away some spare cash is bound to work out cheaper in the long-run.”

“Borrowing money may seem like a convenient way to plug a hole in your spending plans. But a hole in your budget may be a sign of deeper problems that can often be solved, not by increasing net borrowing but by cutting gross spending.”

Fool.co.uk’s five useful tips when taking out a loan

Borrow the absolute minimum you need - the more you borrow the more interest you pay.

Keep the term of your loan as short as possible while keeping your monthly repayments affordable.

If you choose a variable rate loan make sure that you budget for higher repayments.

Always compare the Total Amount Repayable (TAR) rather than the Annual Percentage Rate (APR) because APRs can be manipulated.

Always check for early payment penalties. For the majority of personal loans you be charged up to two months extra interest if you retire your loan early.