The idea of taking out a loan automatically seems to have negative connotations attached to it, however if you’re struggling with your finances after this Christmas, it might seem like a tempting option.
Loans do come in many different forms however and the important part is that whatever finance options you take, the important part is that you go into it informed; what are the pluses and negatives? What’s great and what’s really not? Read on to find out.
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The good: This part is simple; you get a roof over your head. Like nothing else you’ll ever have, owning a house is one of the most significant financial decisions of your life and without a mortgage this would often not be possible.
The bad: This loan will often be tied in to your home. If you slip up on the repayments, you could find your house and potentially your family in jeopardy. Mortgages will also frequently require a large down payment. However, short of a massive windfall it’s unlikely you’ll be able to afford a house any other way.
Short Term Loans
The good: Often vilified, a short term or “payday” loan can often help weather the storm in a financial emergency, your money is available fast so you can use it where it’s needed. The immediacy offered and flexible repayment dates can make this a great option for short term financial worries.
The Bad: If you miss your repayment, this short term solution can turn into a long term problem. High interest rates and inflexible repayment periods mean it’s essential to make your repayments on time.
The good: Unlike the two “installment” loans above, a credit card is a “revolving” loan. This means that you set a limit with your bank, and then you’re free to spend up to that amount; you can borrow up to your limit, pay it off and then borrow it again. This sort of flexibility can be a useful resource for a busy lifestyle.
The bad: Unfortunately, while credit cards often offer 0% interest as an introductory offer, their interest rates are often very high; missing your payments could see you hit by high interest and late payment charges.
The good: It’ll never get better than this. In the UK, your student loan is given to you for the purpose of paying your tuition fees with a smaller secondary loan awarded for living expenses if needed. Your student loan has the best interest rate you’ll ever get and doesn’t need to be repaid until you start earning over the threshold.
The bad: There’s a lot of it. The BBC suggests that the average students debt could reach £53,000. This is a scary amount of debt for student just entering the working world for the first time. This loan is only available to students, and may not be applicable in your country.
If you find you need a loan, weigh up what’s best for you. There are pros and cons about each type of loan on this list and the key to successfully borrowing is to make sure your finance solution is the right one for your needs.
Geoffery is a finance writer who is specialized in the personal finance industry. When he is not blogging about personal finance he writes about short term loans for sites similar to www.wonga.com – a digital finance company based in London, UK.