While everyone starts out with the best intentions when it comes to money and finances, in most cases there will come a point in your life where you just don’t have enough money to cover an expense or a purchase. Recent statistics show that the average UK household owes £12,887, which is a new record high. This figure doesn’t even include mortgages.
So what happens if you’ve managed to stay out of debt up to this point but an expense or purchase has popped up? Is it worth you taking out a loan? Here we’ll take a look at what a loan entails, how many people are seeking loans in the UK, and when it makes sense for you to consider applying for one.
Debt Is On the Rise in the UK
Statistics from the Office for National Statistics (ONS) show that the UK’s unsecured debt has now reached £349bn, which is the highest it has been since December 2008. So even though the overall unsecured debt isn’t a record high, certainly the average amount each household owes is a new record. Over the past five years alone, the average household debt has increased by 7%.
Unfortunately, wages have not risen at the same rate, which is what explains such an increase in the amount of debt. It’s not unusual for people to now have an overdraft, second mortgages, credit cards, loans, and find themselves falling behind on their monthly bills.
What is a Loan?
If you’re new to borrowing money, then it’s wise to take the time to do your research first and learn what a loan is, what types there are, and what kind of repayment terms you’d be looking at.
A loan is nothing more than borrowing a set amount of money in exchange for repayment of the principal amount (the amount you borrowed) plus the interest charges. The repayment terms are set ahead of time and will lay out how often you need to make payments, how you make the payments, and how long you have to pay it back.
As far as where you go to get a loan, there are quick loans that can provide you with a set amount of cash quickly, or you can look at more traditional loans from banks and financial institutions. These more traditional loans tend to offer a higher amount of money with longer repayment terms. The quick loans are ideal for those looking for quick cash and who have plans to pay it back relatively fast.
What Types of Loans Are There?
Did you know that there are also different types of loans? In order to pick the best one for your needs, it’s important to understand your options. The main types are secured and unsecured loans. A secured loan is one that is backed by collateral of some sort. An unsecured loan doesn’t have any collateral. Because unsecured loans are more of a risk for the lender, they tend to have higher interest rates. With the secured loan, if you default on paying it back, the lender has a right to repossess the collateral, so they aren’t really taking much of a risk.
Another term you may come across as you shop for a loan is term loans versus revolving loans. A term loan is one that you pay off over a set amount of time. The payments are divided into equal instalments. A revolving loan is one you can pay back and then use that money again. A credit card is an excellent example of a revolving loan. You make your minimum payment, clear space on the card, and then you can keep using it.
Common Reasons for a Loan
So what is the right reason or the right situation to consider getting a loan? There are actually a number of common reasons people apply for a loan. It’s best to look at a loan in terms of the repayment rather than why you are getting one. Are you capable of paying it back in full? Will you be able to pay the set instalments? Are you okay with paying the interest rates? If you can answer yes to all of those questions, then chances are high that a loan makes sense for you.
In terms of personal loans, there are a few common reasons that stand out. These include:
- Debt consolidation to get a better interest rate, pay less overall, and get the debt paid off
- Pay for an upcoming wedding
- Renovations on your home
- Buying a car or caravan
- Going on a dream holiday
Make Sure You are Well Informed
When it comes to getting a loan, the best piece of advice is to make sure you are well-informed, understand the different types of loans, how the interest rate affects the amount you pay back, and the repayment terms themselves.