Worried about debt? It might not be as harmful as you think.
It’s extremely uncommon to meet anyone who doesn’t have at least some kind of monetary debt; whether that’s in the form of a mortgage, a credit card, payday loans, bad credit loans or, well… anything. In fact, even some car insurance policies are paid in arrears as a finance agreement.
Whilst it might seem overwhelming, being in debt is not necessarily a bad thing, as it allows you to prove your potential as a borrower. It is incredibly important that you don’t take out more than you can pay off, however, and you should always endeavour to live within your means.
There are some people who do have too much debt and in some cases it can significant financial harm – these cases are often caused by borrowing more than can be reasonably paid off or an unexpected change in the borrower’s financial circumstances.
The reality is that most people will experience debt at some point in their lives, so it’s important to focus on the positive aspects of how certain debt can help you grow. You must consider before you take out any kind of financial commitment that you absolutely can afford the minimum payment and that you only ever borrow money if the positives outweigh the negatives.
Let’s have a look at how borrowing money in different capacities might be able to help you:
Typically, many borrowers will have more than one type of outstanding loan. The average UK household debt as of the beginning of the year was over £15,000k excluding a mortgage, which is often spread across more than one type of loan – usually, two or three credit cards.
A consolidation loan is when a user takes out a new loan, equal to or greater than their total amount of debt, to pay off every outstanding balance and consolidate their monthly payments into one loan.
This may have several benefits: a consolidation can reduce your total monthly repayable amount, meaning you have more money each month to put towards your loan. You’ll be making a smaller number of payments, so it’s likely that you’ll be paying less interest over the course of a month. It will also be much easier to keep track of your outgoings and work on bringing that balance down.
The reason that most people would consider a loan of any kind is to cover a large purchase that might be immediately necessary, such as a car or a home improvement. You can’t always be prepared, or savings might not cover the total amount – in these circumstances, a personal loan can be extremely helpful.
Personal loans come in a variety of different options. They are available from high street banks, though these have stricter lending criteria, guarantor loans, and bad credit loans. Some loans (such as bad credit loans) can be considered ‘high risk’ for the lender, so will often come at the expense of higher interest rates.
Unexpected bills catch us all off guard from time to time, as they always come at the most inconvenient times. You can’t predict when you need emergency car repairs, a vet visit or even catch-up payments to an inaccurately charged service – this is a situation in which a payday loan can be useful.
Designed to be paid back by your next payday, a payday loan can be immensely helpful when you need to make last minute payments that you’ve not budgeted for, and in most cases can be granted or paid to you within the hour!
One of the primary uses of taking out credit is to build up your credit profile: you need to be able to show that you can reliably pay back your debts in order to gain more favourable interest rates and access to higher credit limits.
Your credit file will be taken into consideration when you apply for most types of loan, especially credit cards and mortgages. There are some exceptions, such as no credit check loans and certain payday loans, though this will be at the lender’s discretion.
The longer you hold a loan or credit card for without missing any payments will show to any potential lender that you are a reliable customer and will not be a lending risk to their business. The higher your credit score is; the more money you might end up saving!
Whilst borrowing money can be useful and at times might even be required, it does come with a set of risks that you should always take into consideration.
Can you afford the minimum payments? Do you have the intention of clearing the borrowed money early? Do you already have a large amount of debt?
If you’re not able to make the minimum repayments at the lease, the total amount of money you will need to pay back will actually increase. The lender will probably add fees or charges for late or non-payment, which will inevitably push the total amount higher.
Depending on the type of loan (unsecured, secured for example) there can also be more severe consequences, such as court summons or repossession of personal property.
Don’t let these risks scare you away from taking out credit if you do need it, as it is ever-important to build a respectable credit score. Live within your means, making sure that your monthly outgoings do not exceed your income.
If you want to explore a great range of financial products, Loan Bird can help.
Are you struggling?
If you are struggling with debt, there are plenty of support networks that exist to provide the help that you need. A good place to start would be the Citizen’s Advice Bureau, who can assist with a range of domestic issues including monetary problems.
CAB will provide any advice that they believe will help you and can point you in the way of specific companies or debt management schemes that will not leave you out of pocket: