Loans: The state of the industry in 2016

After a long period of virtually unavailable credit, things are looking up for Britons who want loans to improve their lot. Interest rates are at an historical low, with HSBC and M&S Bank offering loans of £7,500 over five years at the unprecedented rate of 3.3 percent. Other lenders have reduced their rates nearly as much, some by 2 percent.

Britons are hopping on the money train

With money being so cheap, consumers with good credit scores are rushing to take advantage on both the personal front and on the business front. This can be a good sign, as increased consumption usually leads to increased production, more jobs, and higher wages.

The price of a ticket is higher for some than for others

At the same time, those with less than stellar credit scores are also catching the fever, despite the fact that the loans they can get are as a rule much smaller, and come with significantly higher interest rates and fees. Unfortunately, many of them are doing so out of necessity or on a whim. To make matters worse, too many people – including those prudent individuals who are borrowing for very valid purposes – are taking out loans without first researching the lending market to see where they can get the best rates and terms. They end up spending money they cannot afford, often leaving themselves in worse financial condition than before they jumped on that credit-fueled money train.

When is a loan your friend?

To put it quite simply, a loan is your friend when it meets a couple of basic criteria. Let’s look at a couple.

– The loan funds a genuine improvement in your financial well-being and your lifestyle – Perhaps you need to repair your car or, if it has become a money pit, you need to purchase a replacement. Or you might decide to borrow to pay off a bunch of smaller monthly bills. You might need to overhaul that old, inefficient furnace that always seems to need costly repairs. These kinds of expenses are good candidates for a low-interest loan. In some cases, when the expense is not too great, even a higher-interest short term loan can be acceptable if a loan with better rates and terms is not available.

– It doesn’t cost more than it’s worth or more than you can reliably repay – If the cost of a loan is lower than the savings you can realise as a direct result of borrowing, and you are certain you can make the payments on time, borrowing might be a good idea. You might also want to take advantage of a big sale to replace a piece of furniture or appliance that has outlived its usefulness. The key factor you need to consider is whether you can reasonably expect to be able to make the required payments on time.

There are other instances where borrowing can be a wise choice, of course, but this gives you an idea as to the general guidelines of what constitutes a justifiable loan.

When is a loan NOT your friend?

There will be times when you find yourself tempted to borrow money to pay for things that don’t appreciably enhance your lifestyle, and which can put your finances in an even more precarious condition. Here are a couple of examples.

– The loan is to cover routine, ongoing expenses – Face it, if you don’t have the money now to pay a bill, purchase groceries, or buy gas to get yourself to work, you need to ask yourself whether you will have the money to repay the loan you took out to cover those costs. Unless you can be reasonably certain that the money will be there when the payment is due, this kind of loan is not your friend.

– The loan is to cover the cost of things you might want, but don’t actually need – You might really want a big flat screen television, but if you can’t afford to buy it outright, its appeal may wear thin long before the payments end. And if you have the urge to go shopping, you will probably be like most people in your situation and end up regretting your splurge before it is paid for.

If your credit is bad, you have fewer choices

If you’ve decided that taking out a loan is the right thing to do, your next step is finding a lender. If you have a shaky credit history, you may not be able to get a large loan, and won’t be able to get the best rates. In fact, having to undergo a credit check may discourage you, leaving you to look no further than lenders who don’t run credit checks. Even among those, you need to research the lending market as advised above. Even if you have fewer choices, you do still have choices, but only if you research carefully and handle your loan responsibly.

Know when and where to turn for help

Taking out payday loans shouldn’t be a regular habit, but sometimes even the most well intentioned borrower runs into further trouble, necessitating more borrowing. If that sounds like you, begin working to solve your credit problems before they become overwhelming. Avoiding calls and posts from your creditors is never a good idea. Let them know early on that you intend to be responsible and pay off your debts to the best of your ability.

A good place to start is to contact a legitimate debt charity that assists people in improving or repairing their financial situation. If more people educated themselves before they got into debt, there would be far fewer who found themselves in dire financial straits. But even if you find yourself in over your head, follow the advice the charities offer, and never let embarrassment or shame prevent you from talking to an advisor. They are there to help, not judge, and you are far from being the only person who has faced problems.

Photograph by WerbeFabrik

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