Can taking out a loan ever be a good thing?

What do you think about loans? When you hear the word loan is your immediate reaction that they are good and helpful? Or something bad, to be avoided at all cost?

Our attitude to finance is influenced by many different things, but much of it we learn early on in our lives. Research suggests that many of our financial habits are already ingrained in us by the time we are aged just 7.

A few years ago, the BBC conducted a huge scientific survey – The Big Money Test – in conjunction with University College London and the Open University to find out more about peoples’ attitudes to money. They surveyed 100,000 people and established that there are four main ways of looking at money: 

• Status spender: views money as power.
• Generous indulger: views money as generosity.
• Secure saver: views money as security.
• Independence lover: views money as freedom.

 

Whichever of the above best describes you may help to explain your instinctive attitude to loans. But loans are neither good nor bad in themselves, it all depends on the circumstances. 

In this article we look at some of the circumstances when taking out a loan might be a good thing, and things to look for in a good loan.

 

What are common reasons for taking out a loan?

A loan should never be taken out hastily. There needs to be a good reason for borrowing money, and you need to be confident of being able to make the loan repayments.

Some of the most common reasons for taking out a loan in the UK are:

• Home improvements.
• Buying a car.
• Wedding costs.
• A big life change e.g. retraining.
• Special holidays or celebrations.
• Emergency expenses eg medical, funeral or damage to your home.
• Consolidating other loans or debts.

 

When is it worth considering a loan?

We have just seen some common reasons for people taking out loans. But the key thing to keep in mind is that a loan should be based on needs rather than wants. A loan enables you to get your hands on money fast, which is great when it’s something you need. But avoid the temptation to take out a loan every time there is something you want, otherwise you risk your debt getting out of control.

So when considering a loan, ask yourself the following questions:

• Is the loan a carefully considered decision with a specific aim? 
• Will the loan help you to improve your circumstances longer term; for example buying a car, or funding an educational or business opportunity?
• Are you confident that you will be able to repay the loan?
• Is your credit score healthy enough to satisfy the process of applying for a loan?

 

Let’s briefly mention credit scores at this point. Your credit score is a 3 digit rating of your credit worthiness given by one of the three main Credit Reporting Agencies (CRAs) in the UK: Experian, Equifax or Transunion. When you apply for any kind of credit, the lender can access your credit report from one of these CRAs, which includes your credit score and other relevant details. If they are not confident about your ability to repay the credit you are applying for, they may well turn down your application.

However, it’s worth knowing that if your loan application is successful, the process of taking out a loan and managing it well can actually boost your credit score further. It is evidence that you are capable of handling debt and making the required repayments. This information is visible on your credit report, which means that other lenders will be able to access it if you apply for credit with them in future.

So there can be circumstances when taking out a loan can work positively for you. In which case, the next step is to research your loan options and be confident that you are getting a good deal.

 

What should you look for in a good loan?

Firstly be aware that there are two main types of loan: secured and unsecured. Secured loans are usually tied to an asset, most commonly your home. This means that if for any reason you were unable to make your loan repayments, the lender could ultimately repossess your home to get their money back.

Unsecured loans are not tied to any asset. Because of this, the interest rates may be higher than for a secured loan; but there is no associated risk to your home or anything else you own.

So when looking for a loan, make sure that you know whether it is a secured or unsecured loan. You will then need to check a few more things depending on your circumstances. For example:

• Is the lender a direct lender? This means that you deal directly with the loan company; there is no agent or middle man. So no delays and no commission to pay.
• Is the loan at a good rate of interest? 
• Is it clear how much your repayments will be, how often you have to pay and for how long?
• Can you afford the repayments?
• Are there any set up fees?
• Would the company charge you extra if you pay off the loan early?
• If you needed to borrow more money during the loan, would the company top up your loan?
• Is the loan company regulated by the FCA (Financial Conduct Authority?)
• Do you feel that you can trust the company?

It is important that you feel informed and happy with all the above before proceeding with a loan. Look for a company that puts their customers first, and will treat you fairly and with respect.

 

We hope that the above information helps you to think through the pros and cons of taking out a loan, and make the best decision for your current circumstances.

Remember that Munzee Loans is a direct lender and we’re always here to help. If you are considering taking out a loan we’d be happy to see what we can do for you.

Check back here soon for more news and tips from Munzee Loans.