Understanding Loans: The Basics

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In the current economic climate, when it comes to finding yourself short of money, it’s very much a case of ‘there but for the grace of God go all of us.’ It helps to be financially savvy, but sometimes factors outside of our control, like forced redundancies or pay cuts, can decimate our finances and leave us struggling to find the capital we need.

Many people who find themselves in a scenario like this turn to loans to help them out. However, loaning money can be a dangerous game if you don’t understand what you’re doing, how it works or what exactly you’re risking.

Read through our quick guide to educate yourself today.

Take Out a Loan
Take Out a Loan

When Should You Take Out a Loan?

There are many circumstances that prompt people to take out a loan, from lacking the immediate funds to do something that they want, such as purchase a home, expand a business or buy a car, to finding that unforeseen circumstances leave them short of the capital they need.

A loan can be helpful in these scenarios, as it gives you access to the funds you require when you actually need them, and means that emergency situations can be dealt with in the instant and the finer details worked out later. For example, business owners frequently find themselves faced with opportunities that will pass them by if they have to spend time saving funds needed to invest in them. Loans allow them to invest immediately and pay the money back at a later date.

The benefits, then, are simple: they provide you with immediate access to funds as and when you need them.

Remember, though, that the choice of if and when to take out a loan should be entirely dependent on your individual circumstances and your ability to make repayments, and should only be considered if you feel it’s a viable course of action.

Where Can You Borrow Money From?

Many financial institutions offer loans, from major banks to individual companies such as H&T Pawnbrokers.

The first place to start looking for funds will often be your bank. These tend to be able to offer relatively substantial sums because of their size. However, they are often unwilling to lend to those who pose a higher than average risk of being unable to repay, so those with poor credit scores are unlikely to qualify for a loan.

Financial Institution
Financial Institution

This does not mean that you will be unable to secure funds. Credit unions, credit only banks, home financiers, payday lenders and individual loan companies all pose alternative avenues for borrowing money.

Be sure to do your research and work out what type of financial lender would be best for you before committing to anything.

Should You Borrow Money?

When you’re considering taking out a loan, you must always remember that loans are not free money; you have to pay them back, with interest on top. These repayments will have to be made in accordance with a set timescale, with little room for flexibility. If you know that you won’t be able to meet them, then a loan is not for you; it will only make your money troubles worse.

If you do borrow money and default, the consequences may be grievous: foreclosure on the property you used to secure your loan, such as your home or car; visits from the bailiffs; negative credit; or a court enforced repayment plan.

Thus, it’s incredibly important that you only borrow money after performing a careful analysis of your finances, and making sure that your budget can cover your loan repayments plus interest – taking out a loan on the sole basis that you’re short on funds is not a good idea.

Of course, if you have the ability to make these repayments, then there should no detriment attached to loaning the money, with the exception of the interest you agree to pay.