Smart Borrowing: Which Loans Should You Get?

The current global financial crisis has prompted people to adopt a more frugal lifestyle. Apart from eliminating unnecessary expenses, many people have also tried cutting down on loans. But even the most stringent budgeting cannot seem to allocate adequate resources for circumstances that entail emergency expenses.

Should you find yourself in situations where you are forced to borrow money, it helps to know there are certain types of loans that will not be as hard on your budget.

Personal Loans

Personal loans can be used for a variety of purposes – home repairs, bill payment and so on. You borrow a fixed amount of money which you pay for over an agreed period of time, usually at a fixed interest rate. Creditors will usually provide you around £15,000 but you may find other agencies that are willing to lend you up to £20,000. There are two types of personal loans – secured and unsecured.

Under a secured loan, you are typically offered a lower interest rate compared to an unsecured loan but lenders require that you put up your home as surety. An unsecured loan, on the other hand, does not require collateral although you will be required to pay higher interest. Even if your property is out of bounds to lending agencies, you are still, of course, required to settle your debts.

Bank Overdrafts

There are two types of bank overdrafts – authorised and unauthorised. In an authorised overdraft, there is a limit imposed on the amount that you can withdraw from your account. Interest is then charged on the amount that you spend although some banks will offer zero interest for a limited period.

In an unauthorised overdraft, there isn’t a limit on the amount that you can borrow but it is important to note that these carry higher interest rates plus penalty fees.

Shun These Loans

It is not a good idea to take out payday loans no matter how attractive they may seem. Many people take out this type of loan primarily out of convenience. It can be made available in a matter of hours, there are no credit checks conducted and no tedious application procedures involved.

However, payday lending firms usually charge extortionate rates for these loans and borrowers are required to repay within a month’s time. The same goes for credit cards. Credit cards are tools of convenience and it is easy to lose track of your expenses. Some companies attract customers by offering low rates but charge much higher rates once you miss a single payment.