Borrowing and the Basics of Credit

Although we’d all love to be in a position wherein we could simply afford the things that we need at any given time without extra help or assistance, the truth is that most people will need to take out credit or a loan at some time in their life. Whether you need a student loan to help you pay for your education and fund a potential future within a thriving career, or you simply need to purchase a new car, loans are almost everywhere in today’s modern world.
Here, we’re going to look at the basics of borrowing, including what kind of loans you can get when you’re aged over eighteen, and how you can differentiate bad debt from good debt.

What Kind of Loans Are There?

Most of the time, if you choose to borrow money from any different company or organisation, for any reason, you will need to pay back the amount you owe, plus a little extra known as interest. Interest is shown by lenders as an Annual Percentage Rate, or APR, and this will allow you to compare the costs of various financial products.

Here are just some of the most common ways in which people get access to credit:

– Personal Loans: Most personal loans are offered at a fixed amount. You decide how much you need to borrow, and how long you would like to borrow it for, and then make repayments over an agreed period. You will need to repay the loan through monthly instalments until you have completely gotten rid of your debt, but this is one of the cheapest borrowing options available.

– Overdrafts: An overdraft is a unique type of loan wherein your bank account provider will allow you to take more money out of your account than you actually have within it. This is supposed to act as a very short-term solution to borrowing, as the next time the money you get into your account is paid there, the amount that is owed will automatically be removed to clear the overdraft. Some bank accounts offer interest-free overdrafts, but it’s important to make sure that you do not get overdrawn without permission from your bank.

– Credit cards: With a credit card, a provider simply gives you a card that you can use to purchase things, and at the end of each month you receive a statement of how much you owe. You can choose whether you want to pay off the entire balance on the card – or you could pay as little as 5% of the total balance. Of course, if you choose not to pay the full balance, you will be charged interest on the balance remaining on your card. This amount will then be added to your statement for the following month. If you only ever pay off the interest on your debt, then it will take longer, and cost far more to repay.

– Credit union loans: Credit unions are small financial organisations that are set up by members to help support a local community. Most credit unions will provide small loans that account to around £3,000 or less, and these are often much cheaper options than payday loans. The law suggests that the maximum interest rate any credit union can charge is either 42.6% a year or 3% per month.

– Short-term payday loans: Often the worst option for those in need of credit, short term or payday loans are designed to provide you with a small amount of money until you are next paid from your wages or whatever else makes up your income. The problem with payday loans is that although they are easy to get and quick to apply for they also have very high APRs and often come with very heavy penalties if you miss your repayments. Most experts agree that it is essential to look around for other lending opportunities and cheaper solutions before you even consider investing in a payday loan.
When to Borrow Money

Crucially, no matter what kind of loan you are considering taking, it’s important to think carefully about your circumstances and make an informed decision. Some people suggest that debt can sometimes be classed as either good or bad debt. For instance, good debt is borrowing that allows you to make money or improve the prospects that you have in the long term. For instance, if you buy a car so that you can travel to work and make money this is good. In the same way, paying for a student education can be good too, so long as you can manage the repayments associated with your loan.

On the other hand, bad debt is the type of borrowing that doesn’t give you any kind of real return. For instance, this may involve borrowing money to pay for luxury items or expensive things that you don’t really need.

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