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Having a job does not guarantee that you will not run out of money, and so is having a business. Sometimes, no matter how much you save and minimize your expenses, you will still find yourself in the middle of a financial turmoil. It’s a usual scenario though and there’s nothing to be ashamed of. Once in awhile, you will be in a situation wherein you will need of cash and it may be because of an emergency or unexpected bill. What matters is how you get up and overcome it all. There are different options to choose from and one of the most obvious is borrowing from a family or a friend. This is by far, the most common ones; however, it is not the best idea at all times. On the other hand, there are loans. Loans come in different forms – secured and unsecured – and borrowers can choose whatever option, they feel, is the best for them. But despite the popularity of loans, most people do not consider these alternatives because of different reasons. First, they are not familiar with how it works and they find it complicated. Second, it’s because they are intimated by it. All loans come with interest rate and other charges and this is why most people are afraid of it. In addition, most individuals are not confident with their requirements, especially if they have poor credit remarks. Because of this, they disregard loans and stick to other solutions, which often leave them with more financial problems. If you’re one of those who is planning to apply for a loan but you’re not sure if this is the best decision, then this article is best for you!
What Are Loans?
Technically, a loan is the term used when you borrow money to an establishment, a bank or a credit union for example, and you need to pay it back together with interest and other charges. While banks and traditional lending offices are the popular sources, you can also find loans online. It comes in two major types: secured and unsecured. When the loan is secured, it simply means that collateral is needed. Collateral is any item of value that is pledged as a safeguard against the loan. It can be any valuable item, which includes but not limited to house, car, gadget, jewelry, stocks, commercial building or any property. The advantage of using collateral when borrowing money is that the interest rate is lower compared to an unsecured loan. The borrower can also ask for a bigger amount since the lender is more confident with lending money through this option. This is because, in the event of default, the lender has the right to repossess the item, sell it, and use the money to compensate for the entire loan amount. This is a huge risk if you are not certain or committed to repaying the loan back. Meanwhile, there are people who are not confident with submitting collateral. If you fall into the same kind, then you can consider unsecured loans. With this type of loan, you do not any of your assets at risk in case you are not able to repay the loan anymore. However, default causes damage to your credit and sooner or later, you will find yourself struggling financially. Therefore, it’s necessary to evaluate your capability of settling the loan. Otherwise, it’s best to choose another alternative. Unsecured loans have drawbacks, too; since the lender doesn’t have any security against the loan, the lending company will impose higher interest rates and smaller amount. Nevertheless, the amount is still enough to cover your minor expenses.
Advantages Of Borrowing A Loan
Borrowers benefit cash loans despite the interest rate it charges, therefore, if you are in a financial dilemma, it’s really something that you should consider. First and foremost, since loan application can be done online, you can have the convenience of having the money without going out. It’s easy and quick to accomplish; most online loan application forms are completed in less than 5 minutes. The best part is — today’s loan doesn’t take a long time; now, there are lenders who offer same-day loan which is best when you need an emergency fund. Loans come in small and large amount and it can be used for various purposes. You may use it to grow and expand your business, purchase a new home, gadget, or a car, fund an education, consolidate debts and more. Unlike borrowing money from the people you know, you can stretch your cash without bothering anyone. Applying for a loan also helps in saving. While it comes with interest rates, it assists you in repaying other credits, thus, avoiding additional charges.
Disadvantages Of Borrowing A Loan
Loans are one of the best alternatives during emergency cases or when you need big cash; however, it is associated with a number of disadvantages that you should consider before applying for one. First, most lenders have strict requirements that you should comply; failure to do so results in being declined. Some of these requirements are good or excellent credit history, collateral, high income, a guarantor, etc. Banks and lending firms will also demand an accomplished application form, valid ID, employment details, bank account, and so on. Unable to repay the loan is a burden that most people should avoid. For instance, you fail to settle a secured loan or worse, you have defaulted, then your asset will be legally acquired. It’s either you repay the loan with staggering interest rates to repossess your collateral back or you can just accept the fact that it’s gone. Another disadvantage is the expensive interest rates and other charges. Some lenders have too many charges, some of which are hidden, that you need to settle. Most of the times, the amount that you will repay is bigger than what you’ve borrowed, therefore, it’s ideal to find a lender who offers the lowest interest rate. It’s also necessary to study its terms and conditions to avoid paying for hidden charges.
Representative example: £400 borrowed for 90 days.
Total amount repayable is £561.92 in 3 monthly instalments of £187.31.
Interest charged is £161.92, interest rate 161.9% (variable)