MSE’s Academy of Money
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MSE’s Academy of Money

Session 3: Borrowing money


Martin Lewis introduces Session 3 on borrowing, exploring the good and bad reasons people may have for getting into debt.

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Transcript: Video 1 Introduction to Session 3

Debt. Debt is like fire. Used right, it’s a useful tool. Used wrong, and it burns. Now, the module is going to take you through some of the technicals. But before you get there, I want to talk to you about when is it right or wrong to borrow?
And to do that, for a long time I talk about my good debt/bad debt quiz. It’s a little bit easy, but the idea is to get you thinking. So let’s start. Question number 1, we’ve been saving for a long time to get a mortgage to buy a house.
We’ve got a decent deposit together, and we’ve found a fixed rate for five years that we know we can afford. In fact, it’s going to be cheaper than our rent. This isn’t an investment. This is somewhere for me and my family to live for the long term. Is that good debt or bad debt? So you answer in your own head.
Of course, it’s good debt. It’s planned. It’s rational. It’s affordable. It enables you to do something that you wouldn’t otherwise be able to do without borrowing, and something that’s good for you in life.
We have to get away from that age-old, grand parental wisdom of neither a borrower nor a lender be. That simply doesn’t work in the 21st century. For some things in our lives, we will need to borrow, whether it’s buying a house, or whether it’s getting what they call debt when you go to university. Borrowing isn’t necessarily a bad thing. It’s all about understanding the difference between good and bad debt.
Question 2, I want to go on holiday, and there’s a holiday to Jamaica for 5,000 pounds. I earn 6,000 pounds a year, but the payday loan company has said they’ll lend me the money at only 10% interest, an hour. Good debt, bad debt?
Yeah, look, no surprise, Sherlock. It’s bad debt. Nobody get the point from this I’m saying you should always be borrowing. Borrowing can be right or wrong. It needs to be planned, a one-off, affordable, budgeted for that you can afford the repayments.
If it isn’t, don’t touch it. Don’t sniff it. Don’t smell it. You need to understand both, should I be borrowing? And if I do borrow, what’s the right way to do it? The answer to that is as cheaply as possible, and repaid as quickly as you possibly can, because the longer you borrow for, the more the interest adds up and up and up.
Question 3, I lost my job six months ago. It’s been a really tough time for me and the family, and I’ve been struggling to get a new job. But I’ve just been offered one.
I live in the city. This new job’s in the countryside, so we’re going to have to relocate, but I found an affordable house that I can rent. However, when we do move to that house, my job’s 6 miles in that direction, and my kids’ school’s 7 miles in that direction, and one of them has a bad knee so we can’t cycle. So we’re going to need transport.
But there’s no public transport where we live. That’s what I used to rely on in the city. So I need to get a car. The cheapest reliable car I can find is 2,000 pounds, but I’ve got no savings left. I’m going to have to borrow for it. And the cheapest loan I can get is at 20% APR, because having been out of work, my credit score isn’t that good.
But if I don’t get the car, I can’t take the job, because I couldn’t get to work, and the kids couldn’t get to school. But the job has a three-month probationary period. So if, after three months, I’ve got the car and then they let me go, I won’t be able to afford the repayments. I might even go bankrupt. But if I don’t get the car, I can’t get the job. Good debt, bad debt?
You’re probably not answering this one as quickly. Have a moment to think about it. OK, let me give you the official, Martin Lewis, money saving expert answer. This is grey debt, somewhere between good and bad debt. I know. I cheated a little bit. I’m allowed. I’m setting the question.
But this is the question that truly resembles real life. Borrowing is never that clear-cut. Now, if you said it’s good debt because you said to yourself, you know what? I’ve got faith in my own abilities.
I’m going to work hard. I’m going to get that job. They’re going to keep me on after the three-month probationary period, and then life’s going to get better, well done. You made a good, rational decision.
If you said, it’s bad debt. I’m risk-averse. I don’t want the borrowing. I think I’ll get another job somewhere else. If I wait and work hard enough, it’s going to work out for me, well done. You made a rational decision. You were right for you.
If you didn’t make a decision, or you didn’t think it through, that’s the problem. One of the things they don’t teach us in school, and one of the big problems we all have to deal with in our life, is wrestling with uncertainty. It could be, should I get the loan? Should I fix my gas and electricity bill, or my mortgage? Should I marry him or her?
All of them are answers, that without a crystal ball, we don’t know how it’ll work out. So what you have to do is think it through. Write down the pluses and the negatives. Plan for the worst. Hope for the best.
Don’t then, once you’ve made your decision, if it goes wrong, sit there and think, I made a bad decision. If you did everything you possibly could knowing what you could, you didn’t make a bad decision. You had a bad outcome. And you mustn’t confuse the two.
We can’t always get it right, but we can always do all we can to think through the options. And if you’ve done that, that’s as much as any of us can do for ourselves. Don’t feel guilty about it afterwards. But when it comes to debt, don’t simply get it willy-nilly. Then I would tell you off.
End transcript: Video 1 Introduction to Session 3
Video 1 Introduction to Session 3
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While borrowing should never be done lightly, and should always be for something affordable and budgeted for, if people are able to manage their debts sensibly and repay money at least on time or, better still, as quickly as possible, then there is no need to panic. After all, most people cannot afford to buy a home or car up front so need to borrow cash, which in turn helps to fuel the various markets.

In the UK in 2021 personal debt amounted to an astonishing total of £1.7 trillion. That is £1,700 billion pounds of borrowed money that is owed by households in the UK.

The good news is that for many people, borrowing doesn’t cause them financial problems. But for some people repaying borrowed money is a problem.

Yet, some people cannot borrow at a reasonable cost due to their poor credit status. Their circumstances, often related to being on low incomes, may force them to use expensive sources of borrowing such as high-cost short-term credit – and the cost of borrowing in this way may mean their financial difficulties worsen.

This session of the course focuses on what you need to know to be able to borrow effectively on the best terms, and on what you need to do to make sure borrowing money is helpful, rather than the source of financial nightmares.

You will also see that the ability to borrow and the cost of borrowing are determined both by things you have some control over (such as your financial position and credit history, which affect your attractiveness as a borrowing customer) and things which you cannot control (like the prevailing level of interest rates).

After studying this session, you should be able to:

  • understand who you can borrow from and what products are available
  • understand what affects your credit score and what you can do to manage it
  • know when borrowing is sensible and when it is reckless
  • understand what determines the cost of borrowing money
  • understand the relative cost of different ways of borrowing.

This Session is one of a suite comprising the course MSE’s Academy of Money and has been made possible by financial and content contributions by


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