Many people falsely believe that a some loans are a handy way to get some fast and easy cash. Maybe it is the amount of interest which has now been capped that gives them that feeling. The truth is that, no matter how one sees it, a loan is a costly burden you should not want to have on your shoulders right now. Take one out, and you will soon realise that it is too much of a risk; you definitely risk traumatising your finances, not to mention that it is highly possible you eventually pay back 2X what you have borrowed.
Loans are definitely not to your best interest. Yet, if you are thinking about taking out one, at least, make sure you protect yourself. How? Start by considering alternative routes that will cost you cheaper. If that doesn’t work, we will help you go through the lesser of two evils.
Let us take first things first…
Loan Guide: What Is a Loan?
A loan is often a alternative lending loan (lasts from a few days to up to a month but there are lenders that can stretch the pay back period to up to 6 months) that can range from as little as £100 to £1,000 or so and is designed to provide you with financial assistance to help you through a difficult period until you next get paid.
If, for example, you are facing an emergency that you can’t cover with your savings or monthly salary and need cash urgently (i.e. your boiler has broken down), you have the option to get a loan. On the day the next salary payment is due for payment, the company will take the payment from your credit card (usually, you will have to agree to that).
10 Critical Points You Need To Know About Loans
Point#1: Some Loans are Tricky Loans
Some loans are often extremely easy to get. We know of people that have got one on their mobile after a night out with friends drinking heavily. That ease alone should raise a few red flags. Although they may feel convenient, some loans are also dangerous because if you don’t think about what you are doing and act recklessly, you could find yourself in a bigger debt than before.
More than often we see people get stung by their own lending decisions and the tricks used by loan firms. So, we suggest you read this guide carefully, explore your options, and then consider the alternatives you could use thoroughly before you decide that a loan is your best shot.
If you must get a loan and it is a last resort option for you to fill a one-off gap in your finances, just make sure you use it right (pay it off in time).
Point #2: Some Loans Are Extremely Expensive
Credit cards charge an interest rate at 20% APR (typically). This means that if you borrow £100, you will need to pay back £125 in a year, provided, of course, you don’t miss any repayments.
Some loans charge a fee. Typically, that fee is around £25 for a £100 loan. So, the total amount you will need to repay after you get a loan of £100 is £125 that you will need to repay in a month. That is £5 more for a month’s loan than what you will have to pay for a credit card debt in 12 months!
Real life reports :
I have made a loan to Oakam and i have been late with it for 5 months in wich the sum of 500 that i have took from them generated a payment back of 1065…so more then double.
Marta22ro – Consumer Action Group
As you can understand, some loans charge you WAY more for a single month than credit cards do for an entire year.
Point #3: 1000% APRs Are Pointless
Lets speak of the typical charges lenders make as if they were APRs (Annual Percentage Rate – the rate you pay on the amount of cash you have borrowed over a year, including fees and interest). You will find out that most lenders work with a 1000%+ fee. However, if you borrow over a smaller period of time, these APRs are meaningless because even a small fee can easily turn into a horrific APR. So, if they are not being used as a welcome scare, these APRs are really valueless.
Now, you may ask “If these APRs are valueless, then why do they have to put them?”. Good question. The thing is that whoever offers people a loan is obliged by law to have their APR marked on their website and on all their adverts, in large letters. And, as mentioned above, APRs refer to the yearly costs. some loans, on the other hand, are taken out for a short time (usually a matter of weeks), not years. So, for these loans, the APR is not as relevant as the amount you will need to pay back.
Worst case scenario? You are unable to pay back the loan in time. Then, be prepared to see these astronomical APRs turn into a frightening reality as fees and charges add up.
Point #4: If You Make This a Habit, Then You Have a Big Problem
Refrain from using loans to fill the gap between your expenses and incomings in a month. This is not what loans should be used for. If you are regularly getting loans, the loans will only make things worse for you. Eventually, you will most likely end up being in a debt spiral before you know it. Yes, getting a loan for a small amount is easy. So is getting another one the next month, and so on. See where this is going?
Wouldn’t it be much better if you could sort out a budget and try to bring balance between your income and outcomings?
Point #5: Can’t Pay a Loan Back On Time? Can’t Afford To Get It
It is very important that you know exactly how you are going to repay a loan. If you are still uncertain, then it is best not to take it out, no matter how urgently you need it. I can assure you that in the end, you will have worse financial problems than now. Instead, go through the Loan Alternatives section below. Now, if you are really desperate and getting a loan IS your only option, I suggest you contact a non-profit debt counselling agency for one-on-one debt counselling help. It is a far better option if you are not sure how you will repay a loan.
Real life reports :
Today we got a letter from Advantis, havent had letter from them before so debt must have been passed on again. They are threatening doorstep collectors and County Court action.
ELFYP – Legal BeaglesELFYP – Legal Beagles
Point #6: Mind The Interest If You Borrow Over Longer Periods
You will find several lenders that offer a 3-month period to pay back the loan (instead of the typical one month). This means that your next paycheck won’t suffer as much because you can pay the loan back over 90 days; not 30. Helps with budgeting, right? Normally, we would agree if we didn’t consider the interest. Although there are price caps for loans, which means that the maximum amount you will pay is 2X the amount you have borrowed, I suggest you don’t rely on that. The longer you borrow for, the more the costs spiral towards that cap. Instead, have a detailed pay off plan and stick to it.
Point #7: Get a Loan Once & You Will Be Tempted Again
For those that pay back a loan on time, it is extremely likely the loan company will try to seduce them again. Why shouldn’t they? If you are a good customer that has repaid your debt on time, you will likely be able to repay a second one. You made money for them once so they will want to make even more money from you. Beware as there is a big danger here. The lender will surely offer you a larger amount than your previous loan. That amount will, of course, have bigger charges. They will employ tricks, such as a so-called discounted fee. Don’t fall into the trap (because that’s what this is). It’s just their way to get you into more debt.
Point #8: Some Loans Have a Stricter Effect On Your Credit Score
We have already mentioned that every time you apply for a credit (any credit), it hits your credit score. Your credit score helps lenders predict your likely behaviour if they lend you money. Lenders also use data from credit reference agencies to determine your score. The bad news with some loans is that they are in a different section on your credit report so that those who make lending decisions (aka underwriters) can quickly see how often (and how much) you have used loans.
This can severely affect your ability to get a mortgage, even if you have repaid the loan(s) on time. In fact, some mortgage lenders, such as Kensington Mortgages and GE Home Lending have said that they will not accept for a mortgage applicants that have used loans, even if they have paid them off on time. Why? Because they believe that the need to get a loan implies there are underlying financial problems with an applicant, as well as money management and budgeting issues. If you are applying for a mortgage, the presence of loans on your credit report puts lenders into serious thought about whether you will be able to meet a monthly mortgage payment consistently.
Note: The majority of lenders credit check their applicants and turn down 60% (and up to 90%) of first-time applicants because their credit records indicate an inability to pay their loan back.
You may hear loan firms claim that getting a loan and paying it back on time will have a positive effect on your credit score. Yes, you will have a relatively better score than if you hadn’t paid the loan in full on time, which can improve indicative scores from the credit rating agencies. Is that the same as making it more possible for a lender to give you a conventional loan or credit card? Absolutely not. It is totally up to the lender how you score in their eyes. Some may see you as a profitable customer while others may reject you instantly.
For those with a bad credit history, there are Credit Cards for Bad Credit that you could consider.
Some smaller lenders advertise loans with “no credit checks”. This means that they don’t share your payment information with credit reference agencies. Although this is a good thing as getting a loan won’t hit your credit rating, it also shows that the lender is not trustworthy and responsible because they don’t check whether the applicants can really afford to repay. Plus, other lenders will be unable to see your loan, which means that their lending could be irresponsible too.
Point #9: The Recurring Payment Gives Lenders The Right To Take Your Parents’ or Friends’ Money
Some lenders have a common tactic to ask accepted applicants to pay using a recurring payment (aka Continuous Payment Authority or CPA). This gives them the right to take your parents’ or friends’ money if they make a payment for you. Some lenders can also collect payment whenever they choose they must, which is particularly dangerous, especially if you have more important bills to pay. What is somewhat comforting is that they are limited to only two attempts to collect payment.
You can cancel the recurring payment. Just ask the bank that runs your account to do so. Let’s note at this point that we are not in favour of reneging on your debts. We only point out the scary lack of control such types of payments give you. Admittedly, it is much more preferred to call the lender and pay the debt in full.
Important Note: If you are using a CPA, you are causing problems to parents or friends that have agreed to pay one repayment or the entire loan on your behalf. We have had reports of lenders that have kept the details of such family members’ and friends’ accounts and then used them for any future loans the borrower had taken out; many times, without an agreement!
Point #10: Beware of Loan Sharks
Loan sharks are unlicensed money lenders that break the law. If you borrow money from them, they will not hesitate to knock on your door and even use violence against you or your family or kids to get their money back as per the agreement you have made. Stay away from them. If you know of any near where you live, text LOAN SHARK and then their details to 60003, call 0300 555 2222 and report them, or visit StopLoanSharks – England only. For Wales, Scotland, and Norther Ireland, check the Government’s Report a Loan Shark page.
Important Note: When you borrow money, always check if the lender is registered. For example, loan companies have a credit licence that you can check at the FCA Consumer Credit Register. However, take note than the majority of consumer credit licences do not cost more than £1,000 to get. So, it is important to double check the company (i.e. Google it).
Loans Guide to Alternatives
There are several great alternative options that can help you borrow the cash you need without getting a loan. Go through them all and decide which one best suits your needs and requirements. We have listed below the alternatives/methods we believe that will allow you to get money fast and cost you less. Let’s clarify that although we would normally not suggest a couple of these methods, they don’t score that bad when compared to loans.
1) Use An Existing Credit Card
If you have a credit card, you can spend on it if you can CLEAR it in full within a month (after a month, you pay interest). That way, your debt is interest-free (hence, cheaper). It is the easiest and more cost-effective option as you don’t need to apply for any financial product (and affect your credit score). This applies to spending, though. Getting a cash advance (i.e. ATM cash withdrawals) comes with a fee and interest.
What happens if you don’t have a credit card you can clear?
You can use any other credit card you do have, provided you have room on your credit limit. If you can’t get any other form of credit, a credit card (any credit card) is usually much cheaper than a loan.
If you are struggling with credit limits, speak to the card provider. Maybe they can increase it for you. It is not wise to spend over your credit limit because you will either be charged a £12 fee, which could make the credit card as expensive as a loan, or be declined.
Tips to Use Your Credit Card Right:
- If you need a loan to make a purchase – Get the card, buy whatever you need to buy, and ensure you pay the debt back in the same time as you would do if you got a loan (usually less than 30 days).
- If you need a loan for cash – To avoid paying interest, don’t withdraw cash on your credit card. It doesn’t matter if you pay the debt off in full; you will still pay interest. Carefully budget and use the credit card for your normal spending for the rest of the month. Try not to spend more than what you can afford. The income you have not spent (the equivalent amount) will be in your bank account, ready to be used as cash to pay the bill or make the purchase. Again, it is important to pay back the debt in full in the same time as you would do with a loan.
2) Grants/Loans from Job Centre/Local Councils
Although not as speedy as loans and not as commonly available any more, which has allowed lenders to enter the marketplace at high rates, the following government-backed funds can be a good option for you.
3) Budgeting Loans & Advances
These loans are offered to people on income-based benefits, such as jobseeker’s allowance, employment & support allowance, or pension credit. If you are accepted, you could get a 0% interest loan of up to £812 for essential items (i.e. furniture) or other necessary things you need a chunk of money for (i.e. to repay debt or pay the rent).
The repayments will be based on what you can actually afford. However, such loans cannot last for more than 2 years. Unfortunately, the high demand has made it more difficult to get approved. If you think that you do qualify for the loan and that your circumstances are urgent, then, by all means, go ahead and apply. If you apply online, you will get a decision within 12 working days (longer if you use other ways to apply).
4) Local Council Support Schemes
Local authorities are responsible for providing their residents in urgent need of money with the proper support. Each local authority has its own criteria to determine whether a resident is indeed struggling with an emergency. However, they all take into consideration citizens on income-based benefits while also prioritising those on the lowest incomes.
An emergency could be considered a situation that:
- Puts your family’s health at risk (i.e. your boiler broke down in the heart of winter).
- Makes you unable to afford to buy food.
- Forces you to seek help to stay in your own home.
Some councils also consider an emergency the instances when you are coming out of care, be it prison or hospital.
Note: Contact your local council to see whether they offer cash, clothing, furniture, food grants, white goods, or vouchers as each council’s procedure is different.
5) Get a 0% Credit Card (Regardless of Your Credit Score)
In the market, there are plenty of 0% credit cards to consider (always much better to borrow money interest-free). Determining exactly what you need money for will help you choose the right one for you. Applications usually take between 5 and 15 working days.
Below, are some important facts to bear in mind:
- Decent Credit Score – If you have a good credit score, you can find cards that offer the 0% deal for more than 12 months. In this case, you have more time to repay. And, if you need to use the interest-free deal again, you have the card ready.
- Poor Credit Score – Nothing is lost yet. There are still a few deals available for people with a poorer credit history. So, you can get a 0% deal (i.e. see Aqua), only for a shorter amount of time (i.e. a few months), which still lasts much longer than a loan. However, note that it is important to make sure you repay the debt within the 0% period. Otherwise, the interest you will be charged is usually over 25%. In many cases, this is still cheaper than loans, though.
- Need a Loan to Make a Purchase – Get a 0% credit card and then use it to buy whatever it is you would need a loan for.
- Need Cash – If you want to take out a loan for cash, get a 0% card and use it for your normal spending while using the equivalent amount of unspent income (the money you have in your bank account) as cash (when the required amount has been built up). Do not withdraw cash as you will be charged with a fee.
- Watch Out Your 0% Spending Card – To make sure you keep the 0% deal, make sure you pay the minimum monthly amount, at least, and clear the card before the expiration of the 0% period to avoid the preposterous interest. Finally, do NOT balance transfer. This usually comes with a high rate. For expensive debts that you need to clear, you will probably need different cards.
6) Consider Community Development Finance Institutions (CDFI) or Local Credit Union
Both CDFI and credit unions are cooperative organisations that run independently. Their goal is to help people that might not have access to financial services and/or products elsewhere. More than often, they offer cheaper loans than other loans while you can borrow more money than with a traditional loan (from £1,500 and up to £15,000 – repaid within 1 to 5 years).
Several credit unions have decided to get together and offer an online portal (namely CU Loans), where you can type in some of your details and get a list of the credit unions that you are eligible for (if any). That way, you know where to apply. Don’t be scared away by the representative APR (13.9%). Credit union loan rates are capped and you can be charged with a maximum of 42.6% on a loan (mainly applicable to alternative lending loans), which is equivalent to 3%/month. The majority of the loans, though, are much cheaper than the cap.
7) Keep a Credit Card Only For Use in Emergencies
When you have a credit card in your wallet, you have a tremendous power available at any given time. The temptation to use it to do more than the absolutely necessary spending is hard to resist. And, before you know it, you have used the card to buy a pair of expensive, new shoes, pay for a couple of dinners at that fancy restaurant, and upgrade your home cinema system. That is the type of people that usually turn to loans to get out of debt when the credit card statement arrives in the mail at the end of the month and realise they don’t have the money to make, at least, the minimum payment.
Although credit cards cost much less than loans (a £200 loan costs around £50 paid within a month – it is free on a credit card repaid in full or around £3-£10 per month in interest, depending on your APR), you need to make sure you keep them for disciplined emergency use only.
So, once you get the credit card, put it in bag, stash it away, and forget all about it. Some people put their credit card in a waterproof bag and straight in the freezer. Extreme measure if you ask me but it works!
8) Borrow From Family or Close Friend
Ask for help if you are in a bad way. That is what families and friends are for. Sometimes, even talking about your money issues with people you know care about you is liberating. Anyhow, it is quite tricky to borrow money from family or friends. We have seen many relationships fall apart because of bad money management and debt repayment problems.
To make both parties feel good, I suggest you borrow from them formally. Write down the exact amount you need to borrow and how long it will take you to repay the debt.
Another option for you is to have a family member or close friend get the cash to lend to you (if the are willing to do so) if they have a better credit score than you but not the cash you need. In this case, ensure they know that the debt becomes legally theirs and not yours.
9) Extend Your Overdraft But Stay Within The Arranged Limit
We would normally not suggest you use your overdraft facility because you will need to pay interest fees. Nevertheless, staying within the agreed overdraft limit will still be cheaper than using a loan, even if you do overextend your overdraft.
Now, if you can’t extend your overdraft because you are already at your limit, you can use your credit card. If you have maxed it out, then get some assistance with your debts. Don’t rush into getting a loan. In this case, it will make things worse for you.
Whatever the agreed overdraft limit is, NEVER go over it. The charges can be overwhelming (i.e. £15/item or £10/day) and eventually cost you much more than a loan.