3 Main Reasons why People Take out Loans

With household debt in the UK having reached a hefty average of £14,000, there’s little doubt that debt has become a prominent feature of modern life in recent times.

There are various reasons for this, from a rise in unsecured lending to the emergence companies such as Likely Loans who extend offers of credit to individuals with poor credit scores.

The recent shift in the lending market has also had an impact on consumers, who are increasingly likely to borrow money for a diverse range of reasons. We’ll consider three of the most prominent below, while asking whether or not these are examples of positive credit.

1. Borrowing to Cover Living Costs

We start with a rising phenomenon, and one that is posing a huge threat to the financial insolvency of UK citizens.

Mastercard credit cards in a jeans pocket

Last summer, it was reported that the number of 18 to 34-year olds becoming insolvent in the UK had increased by a staggering 31.3% in the year ending 2016. According to the Financial Conduct Authority (FCA), this is the direct result of young adults borrowing to cover their living costs, which in turn creates a spiralling cycle of debt that is extremely difficult to overcome.

This is the ultimate example of negative credit, as sees borrowers come to rely on credit to fulfill their most basic needs. When you factor in interest, this means that people are required to borrow incrementally more with every application, eventually creating a burden that is impossible to repay.

2. Borrowing as a Form of Debt Consolidation

While debt consolidation may seem counter-intuitive as it requires to take out an additional loan as a way of combating debt, it remains an example of positive credit when it is used well.

Essentially, debt consolidation is a process through which you borrow a large sum of money with the purpose of settling multiple liabilities. One of the main benefits of this is that enables you to create a single, manageable debt, which requires one monthly repayment and a consistent rate of interest.

So long as you research this option and ensure that your new repayment is affordable, this can prove to be an extremely effective way of managing and reducing your overall debt over time.

BMW prestige car

3. Borrowing to Buy a Vehicle

We finish with an example of secured credit, which is often made available to applicants with poor credit ratings in recent times.

Car loans serve as a viable alternative to people with poor credit scores who cannot source finance, with 26% of respondents from a 2015 study claiming that they borrowed for this exact purpose.

Once again, the key here is to compare the marketplace and select the option that offers the best terms, while measuring these against your estimated disposable income. This type of loan can represent a positive example of credit if you meet your repayments on-time, helping you to source finance or a mortgage in the future.

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