Need a little extra cash, but not sure if your reasons warrant the loan application? Don’t worry, millions of people around the world wonder whether it’s best to take out a personal loan or struggle through the tough financial times. Of course, there are ups and downs to both options.
According to the stats released by Statista, consumer lending in the UK averages on around 22.8 billion pounds per year (statistics from 2017 reports). Consumer lending is typically done via a short term loan or a “payday loan” as it is often also called. According to recent stats released by Finder, most payday loans range from £100 – £1,000 with £260 being the most common amount loaned. Most loan applicants taking out loans of this size would do so at least 6 times over a 12-month period. When you consider how frequent these short-term loans are being applied for, you might be interested to find out what people in the UK are using their short terms loans for. How do your reasons for a short term loan application compare to other applicants in the UK?
Personal Credit Checks Determine the Size of Your Loan
When applying for a short-term loan, as per the financial conduct authority, your current credit rating will affect the outcome of your application and also determine how much you are able to loan. The loan terms and conditions will also depend on your financial history. The better your credit rating is, the more you will be able to loan and the better the terms will be.
Top Uses for Short-Term Loans in the UK
The stats show that most people who get short term loans in the UK use the money for the following reasons:
- Household bills (electric, water)
- Purchase cars/transport
- New furniture
- Home improvements
- Unexpected emergencies/medical expenses
Of course, these are not the only ways you can spend a short-term loan. Below are 3 ways in which you can use a short term personal loan wisely.
1. Monthly shortfall to replace an appliance/furniture
While it might be tempting to take out a short term loan to furnish your home with trendy appliances and furniture, that’s not a wise idea. A scenario where using a short-term loan is viable is if an essential appliance or furniture item breaks or malfunctions, such as a fridge. If your fridge breaks, you won’t be prepared for the unexpected expense and you can’t live without a fridge, so the personal loan makes sense.
2. To protect your safety by means of car servicing and repairs
If you don’t have the cash to service your car or have that nagging rattle sorted out, you could have an accident and face even larger expenses, not to mention the risk of injury or death. If you unable to afford the upcoming service or the repair service, consider applying for a personal loan.
3. To cover unexpected expenses
Ever started studying a course and completely overlooked the fact that you need to buy text books and study materials? A short-term personal loan can help you out of a sticky situation and ensure that you can cover the odds and ends that you had not planned on otherwise.
When Short-Term Lending is a Bad Idea
One of the reasons why so many people in the UK apply for personal loans is that they are exceptionally easy to apply for. They aren’t like mortgages where spans of paperwork is required and the financial history of the applicant is meticulously scrutinised. While your credit rating will be referenced, it is your current relationship with finances that will determine if you are a suitable candidate or not.
It’s important to understand that payday loans and short-term loans are intended to be small and quick to pay off. You shouldn’t be applying for a short-term personal loan if you are looking for a large lump sum. It’s important to consider why you need the loan, before taking it out. For instance, if you wish to take out a short-term loan to pay for a car that will simply depreciate, it is not as good an idea as it is to apply for such a loan to pay for a car that will in turn generate an income for you.
Statistics Uncover the Profile of the Typical Short-Term Loan Applicant
According to the Competition Market Authority (CMA) the typical short-term loan applicant in the UK earns on average £16,500 whereas high street lenders earn on average £13,400.
Most short term lenders in the UK have also experienced financial difficulties in the not too distant past, with a total of around 38% of lenders having a bad credit score. Unfortunately, the statistics also show that a whopping 50% of loan customers don’t shop around for the best possible loan, before getting themselves into debt.
The typical UK consumer looking for a payday loan or a short-term loan is a working professional who is struggling to make ends meet and who has some form of financial issue in the past.
When considering what you can use a short term loan for, remember to keep responsible lending as a top priority. Below are a few tips to ensure that whatever you spend your personal loan on, you do so responsibly.
- Only apply for a personal loan that you can afford to pay back.
- Make sure that you understand the repayment terms and the monthly interest rate attached to your loan instalment.
- Be completely honest when completing an affordability assessment.
- Make sure that you divulge all information on your permanent income as well as any side-line income streams that you might have. The more you are able to afford to pay back, the better your chances of getting a loan.
When it comes to short-term lending, put some time and effort into seeking out a lender that has your best interests at heart.