Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk
We all need some financial help occasionally; this is nothing new. Loans have been around for millennia, the Greeks, Roman, Minoans all made use of financial loans.
Sometimes we just don’t have the capital to either buy what we need or start something new like a business. We turn to individuals or institutions who are willing to lend money. When it comes to the lender they will want to be paid back with interest.
There are generally two types of loans; secured and unsecured loans. A secured loan is one where you the borrower will have to put something up as security (collateral) so that if you fail to repay the loan either in part or full the lender could take that collateral and sell it to get their money back.
Secured loans are normal when borrowing a large amount of money that you intend to repay the money over many years rather than months in the case of short term loans.
If you want to take out a secured loan you must have some sort of collateral that you could use to secure against the loan so that the lender feels secure knowing that in the event you are not able to repay the loan their capital is not at risk.
Although the lender will still perform credit checks to ensure that you are able to repay the loan. The lender is not after your security, they would rather lend the money, and have it repaid with interest which is easier than say repossessing someone’s home to repay the loan.
Therefore, it is important to understand that when you do take out a secured loan and you have used your home as security you must keep up repayments or your home may end up being repossessed.
The benefit of secured loans is that secured loans are much cheaper than unsecured loans such as a payday loans or short-term loans.
Unlike secured loans which require you to put up some sort of security or collateral an unsecured loan is not backed up by the borrower with any sort of security.
So, you might ask why would the lender lend money without any security? Well, simple these loans because of their higher risk to the lender will be more expensive than a secured loan.
The lender will perform the necessary credit checks prior to approving the loan and having a good credit score means it is more likely that the lender will approve the loan. To get an unsecured short-term loan you do not need to own a car or house. Bear in mind that short-term loans will have higher interest rates than secured loans.
Short term loans are not the only types of unsecured loans. Credit cards are also unsecured loans. The credit card provider is lending you the money to make purchases which you should repay at the end of each month or you will be charged interest.
Another type of unsecured loan would be a personal loan from the bank, if you have ever taken out a personal loan you would recall that the bank would not have asked you to put up any security but they did perform a credit check.
People tend to apply for personal loans when they require between £1,000 and £20,000. Anything over this amount it is advised that you take out a secured loan.
People generally take-out short term loans when they need smaller amounts of cash which the local bank would not lend out. These types of loans are the best loans for people that want the money for a very short space of time say a few months. Unsecured loans will come with a higher interest rate since the lender is taking a higher risk since there is no security.
In the past short term loan direct lenders could charge whatever rates of interest they desired and could apply which ever fees they wanted until The Financial Conduct Authority in 2014 stepped in and started to regulated these firms with interest rate and fee caps.
Despite what people may tell you about non-payment of unsecured loans you will not be thrown into jail if you fail to pay. If you fail to pay the lender can take you to court and have a judgement made against you for you to repay the loan at a certain rate each month. Ultimately the lender wants to see their money returned and they would take a little each month as opposed to nothing each month.
Once the judgement is made against you by the court you must pay, otherwise you do run the risk of going to prison. Also, if on your application form you knowingly supplied incorrect information you will have committed financial fraud and you run the risk of going to prison.
Do not lie on your application form, make sure you have the means to repay the loan each month and if you ever run into trouble with the repayments you must contact your lender straight away.
You can use the unsecured loan for whatever you like, the lender has no control over what you decide to spend it on, all they want is that you repay the loan as agreed. Although it is probably best that you use the money for the purpose you intended to use it, if you took out a loan to purchase a car to get you to work then it would not make sense to have a blow out party.
Never use credit cards to make large purchases like a car or holiday since if you do have a good credit history you can get a very decent rate from the bank via a personal loan.
Keeping up repayments and repaying the loan in full will improve your credit rating too so when you need to borrow again in the future you will find it easier to get the loan and most probably cheaper too.
Lenders like to lend money to people who have a history of reliable repayments as they are sure their money is safe and will be paid back with interest. Lenders seek out good borrowers with good credit ratings. If you want the best rates do your best to improve your credit ratings.
It really depends on how bad your credit history happens to be. There are some lenders who specialise in short term loans for people with bad credit. If you are looking to take out a loan you may want to consider a secured loan if you have collateral like property or vehicle.
If you do take out an unsecured loan you will be charged a higher rate of interest which might make the loan unaffordable. Another thing to consider is the length of the loan. The duration of the loan will also affect the rate you will be offered.
The lender is having to take a much larger risk with people who have bad credit as they have bad credit for a reason generally due to not making repayments on time or not repaying at all on past loans.
Since the lender has no guarantee that the loan is going to be repaid and that the loan is not secured against any collateral they could use to sell to repay the loan.
The lender would have to go through the laborious process of taking the borrower to court, get bailiffs involved to seize any valuables the lender could sell to repay the loan.
If the borrower has nothing of any value which could be sold to repay the loan, then the lender will take the borrower to court to have a judgement made against the borrower to have them pay something each month towards to repayment of the loan.
Take care of your credit score and your credit score will take care of you.
Can I Declare Myself Bankrupt?
This is not something that should be taken lightly. Declaring Bankruptcy will be something you will have on your credit score for a long time. If you do decide to declare bankruptcy your home, your car and any valuables you own will be sold to pay off first the secured loans then if there is anything left the rest will go to pay off the unsecured loans.
People tend to take out personal unsecured loans for more common expenses rather than short term loans which are normally taken out for emergencies like broken boiler or the car has broken down.
Weddings, once in a lifetime holiday and such like are the most common reasons for taking out an unsecured personal loan. As stated above the lender only wants to see their money returned with interest although having said that they will not lend to you if you told then for instance you were going on a night out as they would consider you to be frivolous and a higher risk.
Do not ignore your responsibility you have to repaying your loans as no repayment will affect your credit rating.
Although the interest rate on a credit card is lower than say most short term loans out there people find that they end up paying off just the interest each month and never get to the bottom of paying of the principle amount.
That pair of shoes or computer game that was such a good buy could cost you many times more if you only pay back the interest. If you do use a credit card for expenses, we highly recommend that you settle the balance each month. Never allow the interest to build up on the card.
In the 2000’s banks stopped lending small amounts of money to people, it was not financially profitable for them to do so. This gave rise to a new industry of short-term lenders that created payday loans.
The public started to use Payday loans in their millions. In 2013 around 10 million payday loans were taken out in the UK, this has now dropped to 5.4 million in 2018. This is still a very significant amount and shows that there is a demand for this type of loans.
The nature of payday loans means that the interest rates are much higher than traditional secured personal loans or unsecured personal loans which unlike payday loans which are repaid either the following month or over the course of a few months.
Short term payday loans are not to be used to solve long term financial problems.
You should always seek professional advice when handling debt problems. Cashute are not licensed debt advisers and any information contained in this article should not be taken as legal advice. It is your Responsibility to seek out correct legal advice