To Loan or Not to Loan?

11-Apr-2010

Thousands of UK consumers take out loans each year to raise money for thousands of different reasons.  Here we consider two of the most common scenarios and offer some alternative suggestions to help you find the best solution for your needs.

You want to raise money to cover a large one-off expense

If you need a lump sum of cash to pay for a wedding, an expensive holiday or a new car, there may be a number of different options available to you.  If you're a homeowner and you have equity available in your property, you could consider taking out a remortgage on the property as a way of releasing capital.  This would involve swapping to another mortgage deal, either with your current provider or elsewhere.  This would have the added advantage that you may be able to improve on your mortgage interest rate and actually get a more competitive deal.

If you do not own a property, or you do not have available equity, an unsecured loan is the main option available to you.  Unsecured loans are usually available for amounts up to 25,000 GBP.  There is nothing to stop you from taking out an unsecured loan if you are a homeowner, but because you are not willing (or able) to secure the loan against your property (thus providing the lender with some security against you defaulting on the loan), your rate is unlikely to be as competitive.  If you would like to talk through your options with a loan adviser, simply fill out our short loan form to receive a callback.

If you are looking to buy a car or carry out some home improvements, it's worth looking at providers that specialise in loans for these purposes because they might be able to offer a better deal.  For example, car loan providers often give you the option to include a balloon payment - a large lump sum that is made at the end of the loan term in order to keep your monthly repayments to a minimum.  To find an adviser who can help you find a more specialist loan, complete our loan form and make sure to select your loan purpose when asked.

You need to pay off credit cards and other debts

When it seems as though your credit card balance never decreases even though you are making monthly payments to clear the balance, it's time to get yourself out of the vicious cycle.

Firstly, check whether the interest rate on your credit card has increased since you first became a customer.  If your credit rating has gone down since you first took out the card, some providers will respond by upping the rate of interest you have to pay on your outstanding balance.  Regardless of fairness, this is something that car providers are currently allowed to do for consumers they consider more 'risky'.  

You can try calling them up to ask that they put the rate back down again, it does sometimes work.  Alternatively, consider moving your balance to a 0% credit card deal elsewhere.  Some card providers will offer you up to 15 months at a zero rate of interest, giving you a bit of breathing space to get that balance cleared. Compare some of the top credit cards in the market with our credit card comparison table.

As a side point, when you are paying off credit card debt, never, never pay back the minimum amount each month if you can avoid it, you'll never get it cleared this way.  Use our 'Time to Pay Off Debt' Calculator to see how long it out take you with various different amounts, and pay back as much as you can each month. 

So is a loan ever a good idea in this situation?  If you owe money to a number of different creditors and are having trouble juggling the monthly repayments, an unsecured loan offering a lower rate of interest (often known as a debt consolidation loan) could be an option for you.  However, as you would effectively be replacing debt with more debt, you have to be making significant monthly savings by taking this step to make it worthwhile.  Find out more by requesting a callback from a loan adviser.

If you have been unable to apply for a loan and you are struggling with debt repayments, you may wish to consider a debt management programme.  This would involve working with a debt specialist, who would negotiate with your creditors on your behalf and manage your available money each month to ensure that you pay off your debts as quickly as possible.  If you'd like to request a callback from a debt specialist to talk through your options, please complete our short debt management form.

Ask the experts

If you are unsure about the right option to take, it's always better to seek some guidance from an impartial expert rather than trying to go it alone.  This is especially true when you are considering putting your house at risk by securing a loan against it.  If you'd like an initial chat with a loan adviser, you can fill out our short loan form and request a callback.  There's absolutely no obligation to go ahead with any products that are suggested.