If your finances are stretched, one thing you might want to consider is taking out a loan. But is this a good idea?
In this article we look at:
- The most common reasons people take out a loan.
- Advantages and disadvantages of loans.
- How to go about finding the loan that is right for you.
The most common reasons people take out a loan
There are many reasons why you may decide to take out a loan. Most loans do not restrict what you use the money for. Once you have the money, it is yours to do with as you will. But what kind of things might you want to take out a loan for?
Here are six of the most common reasons why people take out a loan:
1. Debt consolidation
When you are in debt, the last thing you need to do is to get into more debt. However, if you are struggling with debt repayments, a new loan at a better rate of interest could make them more affordable. By using a new loan to consolidate existing debts, you would pay off all of those debts and be left with just one manageable monthly payment to make. This could make it easier to pay off your debts and turn your finances around.
2. Home repairs and improvements
If your home needs work doing, and you don’t have funds available, a loan is worth considering. If you put off doing repairs to your home, things can get worse and can end up costing even more money to put right. Which is why many people use a loan to sort out repairs such as external paintwork or a new roof, or to help with the cost of installing a much-needed new kitchen or bathroom.
3. Home emergency
As well as ongoing home repair and maintenance, sometimes things go wrong in your home that need urgent attention. For example, if your boiler or another key appliance breaks down, or your home suffers some kind of damage such as flooding, a loan could enable you to get things sorted straightaway, and get your home up and running safely again.
4. Family events and emergencies
As well as our homes, there are times when we need a cash boost to sort out a family situation. This may be an unfortunate event such as medical expenses, funeral costs, or respite care. Or it could be happier news such as a wedding, new baby, or another type of special celebration. At times like these you don’t want to be worrying about money, you just need to get things organised. This is where a loan could help.
5. Car expenses
Whether you are hoping to replace your car, or need to get work done on your current car, a personal loan could help to fill any financial gap. Either way, if it needs doing it’s best to get it sorted as soon as possible, so that you and your family can start enjoying the benefits of a more reliable car.
6. Career change
As we ease out of lockdown, many people are looking for new jobs or careers. Whatever your current work situation, the pandemic may have made you realise that you want or need to make a change, and that now is the time. Take a look at our recent article How to find a new job in the pandemic to read more on this topic.
Unfortunately sometimes you need a bit of extra money to do this. Whether it’s to pay for a training course, cover travel costs or new clothes for an important interview, or even to buy resources to start your own small business, a loan could help you to make significant work changes.
Advantages and disadvantages of loans
Many people are worried about taking out a loan, even if it could be the answer to their current financial situation. On the one hand, it is very wise to be cautious about any kind of debt, and is not a
decision to be taken lightly. But on the other hand, sometimes we are faced with one of the situations listed above, and need to get them sorted out quickly.
Here are a few things to bear in mind when deciding whether to apply for a loan:
- You are able to get the money you need up front at the beginning of the loan.
- You borrow the money at a fixed rate of interest over an agreed repayment term. You therefore know exactly what you have to repay and for how long you have to do this.
- The interest rate you pay can be considerably lower than various other sources of finance, so a personal loan is a positive alternative to payday loans and other high interest loans.
- If you manage your loan well, and make all the repayments promptly, this can help to boost your credit score.
- Taking out a loan means taking on debt. If you are unsure of your ability to repay that debt, it would not be wise to take a loan.
- Some loans - known as secured loans - are based on the value of an asset you already own, usually your home. That asset acts as a guarantee to the lender. If for any reason you are unable to make loan repayments, it could eventually lead to you losing your home so that the lender can reclaim their money.
How to go about finding the loan that is right for you
When choosing the loan to apply for, you need to carefully check the following aspects:
- How much are the repayments?
- What is the rate of interest?
- What is the repayment period?
- Are there any charges for early repayment?
- Is the loan secured (for example on your home) or unsecured (ie not related to any other asset)?
You may also be worried about being accepted for a loan if you have a low credit score or poor credit history. Whilst it is true that some lenders may reject your application on these criteria, there are other lenders - such as Fair Finance - who look at the bigger picture.
For Fair Finance, our main priority is your current financial situation. We’re interested more in the present than the past. It helps both us as a lender and you as our customer to ensure that loan repayments are affordable for you before going ahead with a new loan. If we are confident that you would be able to afford the loan repayments, we will not hold your past against you.
We hope that the above information helps you in your decision about whether or not to take out a loan. Remember to check back here soon for more financial and lifestyle information from Fair Finance.