4 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 of companies 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 four 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.

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 to Buy a House

Buying a home can be considered a significant investment. You need a considerable amount of money to get the residential property you’re dreaming of. Unfortunately, the costs of purchasing a home may be more than your monthly paycheck or savings. This is where taking out home loans enters the picture.

Generally, home loans refer to a certain amount of money borrowed from lenders or other financial institutions to buy a house. This can be one of your options if you don’t have enough cash to cover the purchase price in the meantime. Once the loan is approved, you need to repay it based on the payment terms and conditions you and the lender agreed upon.

On the other hand, it’s important to know that there are different types of home loans available today. For instance, if you’re looking to buy a sustainable home, taking out ndis home loans may be an ideal choice. And depending on the lender, applying for these loans also may allow you to obtain some discounts on your interest rates, provided you buy a home built in less than one year and in compliance with certain environmental standards.

With those things being said, it’s crucial to conduct research before applying for a home loan. That way, you can get the right loan for your needs.

Mastercard credit cards in a jeans pocket

3. 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.

4. 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, interest rates, and other fees, 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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