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Borrowing money has been around for a very long time. We in the west did not invent it. We simply refined it and made it easier to obtain credit in various forms. We now have a wide choice of credit, from payday loans, short-term loans, overdrafts, credit card, personal loans, logbook loans, mortgages, business loans, bridging loans and this is not an exhaustive list.
Borrowing money is very simple to explain. You need money, someone else has money, they are willing to lend it to you. But they want some benefit to having lent you the money so they will either charge you a flat fee for borrowing the money or they will charge you a daily rate fee called interest for the time that you have the money.
The interest rate which you will be charged is dependent on the lender, the amount of money you wish to borrow, the length of the loan and your personal circumstances i.e. the level of risk you present to the lender.
Although not all loans are the same, for example charging interest on a loan also referred to as usury is not permitted in Islam. This Is because is it believed to cause debt. Therefore, some banks have started to offer products that charge a monthly service fee rather than interest on loans.
Before we dive into why people borrow money it might be useful to look at the various types of loans available today and the differences between them.
Initially there are two main types of loans. These are called unsecured loans and secured loans.
Unsecured: This type of loan is a type of loan which is not backed by any asset owned by the borrower. Unlike a secured loan like a mortgage which may be guaranteed by property an unsecured loan is not backed by any asset. A common example of an unsecured loan would be a credit card, payday loan, overdraft, personal loans
Because these types of loans are a higher risk to the lender, they will usually carry a higher level of interest that a secured loan.
Secured: This type of loan is one where the lender has asked the borrow to put up some form of collateral against the loan. A common example of a secured loan would be a mortgage whereby the borrower will put the property they are purchasing up as security or alternatively if they have another property to secure against, they would use that or a combination of the two.
If the borrower fails to repayment the loan then the lender, in most cases the bank will come and repossess the property/ies.
A car loan may also fall within the category of a secured loan. This depends on the lender themselves and the amount borrowed. Once again, if the borrower fails to make the repayments then the lender can repossess the car, or any other collateral secured against the loan.
* Mortgages: These types of loans are generally taken out to purchase property and are loans for many tens of thousands of pounds up to many millions of pounds which are repaid over the course of decades. These loans are always secured loans and have low interest rates in comparison to other types of loans.
* Car Loans: This type of loan is a specialised type of loan from specific lenders who are versed in lending money to purchase cars. They will understand the motor trade and the resell value of cars. These types of loans are normally secured against the car being financed and/or another form of collateral such a property.
* Credit cards: These are short-term loans that are not secured against any collateral. The lender will grant you a line of credit up to a certain amount each month which you start to pay interest on at month end. It is advisable to always repay the entire balance of all credit cards at the end of each month as not to incur any interest charges. The lender will place a spending limit on credit cards to prevent overspending and financial issues for the borrowers.
* Overdrafts: This is a line of credit granted to a bank account holder. This allows the account holder to have access to funds beyond that of their account balance. There are two types of overdrafts. These are authorised and unauthorised overdrafts. It’s very important that if you do need an overdraft to always agree to it beforehand. This type of credit is unsecured and has a higher rate of interest than a mortgage and can carry some hefty fees.
* Personal loans: These types of loans can be either secured or unsecured. These are normally used to purchase lifestyle products like a holiday, new kitchen or bathroom suite or they can be used to simple consolidate lots of smaller outstanding debt like overdrafts, credit cards, payday loans etc.
Payday loans: These are unsecured short-term loans which are normally repaid within 30 days of being issued. Some payday lenders may allow the loans to be repaid over the course of many months.
Short Term Loans: These are also unsecured loans but unlike payday loans are for slightly higher amounts of money for longer periods of time, between £300 to £1000 and repaid between 3 months and 12 months.
* Bad Credit Loans: There are many lenders who specialise in lending to people with bad or poor credit. Bad credit loans carry a higher risk to the lender than personal loans or guarantor loans. When applying for a bad credit loan the lender will perform a detailed credit check and potentially require the borrowers to provide additional proof of income. These loans are either secured or unsecured depending on the lender.
* Guarantor Loans: These types of loans are a type of secured loan in the sense that the borrower will have someone whom they trust and trusts them to repay the loan if the original borrower fails to repay the loan. This can be a very convenient way for someone with poor credit to get a loan. This type of loan can carry a high risk to the guarantor since they do not benefit from the loan and only take the risk.
We have covered most of the common types of loans available out there now let’s take a look at why people borrow money.
Buying a House
Buying a house, flat or any type of property is generally going to be one of the largest purchases we will ever make in our lives. Most of us do not have a few hundred thousand in our bank accounts and unlikely we are going to win the lottery anytime soon, so we go to the banks who will lend us the money to purchase the property with interest over 25 years.
Many people like nice new, shiny things. They will borrow money to buy the latest gadgets such as the newest mobile phone on a 24-month contract that they pay each month to the mobile phone provider. There are also store cards that allow people to purchase household items on credit such as kitchen appliances or entertainment systems like the latest T.V etc, these are all lines of credit extended to the borrower.
Some people want that once in a life experience which would take them a lifetime to save up for like that around the world cruise or trip to some exotic retreat. Rather than save up and go when they are old and crinkly, they finance the trip and repay it back over the course of many years.
Nowadays people like to be able to talk about doing things rather than seeing things. Seeing the pyramids, or visiting the Grand Canyon has been done to death, so, now people want to plaster their social media pages with them, throwing themselves out of planes, diving with sharks, climbing mountains and the like and will take out personal loans to make it happen.
Consolidate debts Loans
Many people have all manner of outstanding debts. From credit cards debts, overdrafts, car loans, payday loans that they sometimes find it easier to take out one larger loan to repay the smaller outstanding debts. This makes managing finances much easier in the long run and could work out cheaper in interest repayments.
Champaign Tastes, Beer Money.
In this day and age of social media, people living their lives on-line day by day and comparing their lives to those they follow on Instagram or Facebook may make them feel inadequate and so they will try to keep up with the Joneses by borrowing money to maintain a lifestyle so that they may impresses complete strangers on the high street or on-line. These people generally borrow more money than they can afford to repay and end up in debt. Don’t keep up with the Joneses since they are either filthy rich or they are borrowing excessively just to maintain an appearance.
Things never to get into debt for.
Do you really need a new car? Do you really need that bigger house? Do you really need a couple extra inches on your T.V or off your rear end?
Most people find themselves in huge amount of debt because they want the wrong things and borrow to surround themselves with material goods.
Borrowing is not a bad thing, if you are borrowing money to invest in a property that you will renovate to sell for a profit, then go right ahead. If you are borrowing money just so you can sport the latest smart phone to show off with then we say don’t do it.
Research into the reasons given as to why people are requesting loans has shown that more and more people are struggling with their finances.
Why this is might be down to hyper-consumerism here in the west or just simple inability to manage money. Money management has never been taught at school so most kids leaving school have no idea how money works.
Saving money for a rainy day is something which we ought to be doing as practice. Just saving 10% each month is the bare minimum. Lots of people find themselves out of cash before the next payday and look for various types of loans to tide them over to help them pay for car repairs, phone bills, clothes for their children.
Top 10 reasons for loan requests in no particular order
There are good and terrible reasons to borrow money on a short-term basis. We would never recommend anyone to borrow money for Point 6, 7.
Many people in the U.K struggle with debts and many do not know how to start to repay them speaking to a debt advisor is one of the best things you will do along with taking action yourself by speaking directly with your creditors.
https://www.nationaldebtline.org/ and https://www.moneyadviceservice.org.uk
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