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With the cost of living tightening in the UK, borrowing has never been more tempting.
loan Making big life purchases and spreading the cost of necessities can go smoothly, but they can also easily deepen money worries if done for the wrong reasons or without a realistic plan to repay them.
So, when does it make sense to borrow? When should you take a step back?
When a loan can be the right financial instrument
Chartered tax advisers and private client advisers explain that taking out a loan is not inherently a bad thing. st james squareObi Nnochiri, who also said it’s what you do with them that matters.
“Loans make financial sense when they are used for projects that provide long-term value or increase financial resilience, such as buying a home, investing in education or skills, consolidating expensive existing debt or covering short-term cash flow gaps with a clear repayment plan,” he said.
Nnochiri’s last point is crucial. Lending should support stability, not delay the onset of financial crises.
money healthSebrina McCullough, director of external relations, said the loan “makes sense if it actually improves your situation in the long run.” […] Where people often get stuck is borrowing money to fill the gap, which is really about ongoing affordability. “
Her team often hears from people who are simply using credit to pay their daily bills. “This usually indicates that borrowing will make things harder, not easier,” she warns.
Borrowing for education, housing or consolidating more expensive debt may make sense – as long as repayments are sustainable. Borrowing for a vacation or lifestyle upgrade is harder to justify unless you can easily pay off your debt even in bad months.
When a loan does more harm than good
Financial experts agree that borrowing becomes risky when people use it to meet daily expenses or fund non-essential items.
As Nnochiri says, “Borrowing should generally be avoided when used for daily expenses or non-essential purchases, especially if it is difficult to maintain repayments or if you are dependent on future income growth.
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“If you need to borrow just to pay regular bills, this may be a sign of greater financial stress and should be addressed before taking on further debt.”
In other words, if you’re borrowing money to maintain the status quo, the problem is usually not a lack of credit but an affordability gap that can’t be fixed with another repayment.
High-cost credit is a bigger red flag. McCullough described payday loans as “a major red flag” that “looks like a quick fix, but all too often we see them pulling people into a borrowing cycle.”
Exceed monthly repayments
One of the pitfalls is focusing only on monthly numbers rather than overall costs.
Nnochiri warned that “people should not just focus on the monthly repayments before applying for a loan.”
The interest rate, whether fixed or variable, and the length of the term, can change what you pay over time—sometimes dramatically.
“Lower monthly payments may feel more affordable in the long run, but it often means paying a much higher price overall,” McCullough said.
Checking your credit file before applying can also prevent surprises—repeated rejections may make approval more difficult the next time.
Test whether you can really afford it
Both experts stressed the importance of a realistic household budget. That means including everything—bills, food, existing debt, childcare, gas—not just the “big” costs.
Nnochiri said, “A realistic affordability assessment starts with a detailed household budget […] People should also stress-test their finances, asking whether the repayments will still be affordable if interest rates rise or income falls. “
Relying on working overtime or hoping for a promotion is risky. As he says, “Loan repayments should fit squarely within your budget, not over it.”
McCullough recommends thinking of your budget as a flexibility test. “Ask yourself if you can still manage the repayments if your bills go up, your income goes down, or things don’t go as planned.” If the answer is no, you could be stressing yourself out later.
Already in debt? Pause before borrowing more
If you’re already dealing with repayment issues, applying for another loan shouldn’t be your first reaction.
Nnochiri recommends people review all the debt they already have and focus on clearing out the most expensive debts first. He said if repayments were slipping or the credit was just to make ends meet, “it’s important to get help early”.
This help doesn’t have to be expensive. McCullough recommends speaking with a free, impartial counselor.
“Getting support early can prevent short-term funding problems from turning into more difficult problems to solve.”
So, when does it make sense to borrow?
If a loan can buy you something lasting—qualification, a home, or restructure expensive debt into something manageable—then it can be a rational financial choice.
If the fees it pays disappear long before the loan is made, or if repayments can only be made if all goes well, the risk rises dramatically.
Perhaps the simplest way to think about it is this: Debt should serve your long-term life goals. If not, pause, seek advice and ask if there is a better route.