Browsing Category: "Borrowing"
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.
How to Borrow Wisely
Borrowing wisely involves two major things: the right attitude toward the activity of acquiring the money and repaying it and the right drive to obtain the necessary information.
The problem with many borrowers is that they borrow thousands of pounds a year without even reading the fine print of the new debt they have just acquired. Fine prints are meant to be read- because you can scrutinize these if there are irregular business practices.
Shopping for credit?
According to Sherman Hanna, chairman of the Department of Family Resource Management:
“People would never think of buying the first refrigerator or television that they see, but they don’t apply the same principles to their search for credit. Most people will contact just one lender when they need a personal loan, not realizing they could possibly save a significant amount of money if they were more selective.”
Borrowing, or the acquisition of credit is never a linear, one-sided process. Just like looking for the best products to put in your home, credit is disposed off by different companies with different aims in mind.
Some lenders are outwardly brutish- they won’t care whether you’re driven down by high interest rates and a short grace period. Older, more reliable and legitimate lenders on the other hand, have more humane policies and binding contracts.
The education connection
According to a study made by Ohio State University, the educational achievement of a person often has a bearing on his or her “credit shopping” abilities. According to the study:
“Education was the most important factor related to comparative shopping for loans. Consumers with a college degree were three times more likely to shop for a loan than those without a high school diploma, after factors such as income and size of loan were taken into account.”
Borrowing from relatives
If you feel queasy about borrowing from lenders, you can just borrow from your relatives. However, keep in mind that borrowing from relatives does not give you the license to become a bad borrower. Always approach the activity of borrowing as formally as possible.
If possible, assure the lender that you will pay with interest within a specific time period, and that you will repay the debt in full. This approach is especially effective if you wish to borrow money to start a small business. Your relatives can pull their resources to make the business work.
Also, remember to put everything that transpires between you and the relative-lender in writing. This formalizes everything, and if something goes awry, both the lender and the borrower have something to hold on to, to settle disputes.
