In today’s world, people often tend to get caught up in a myriad of expenses, some of which are medical, educational, property, and so forth. These expenses are also the most expensive, which is probably why people tend to rely on loans to make ends meet. If you want to apply for a loan and do so wisely, this article is for you:
When should you apply for a loan?
As a rule of thumb, stay away from loans unless you have a genuine reason. You should probably also stay away from loans if you have a poor credit history and are unsure as to how to build credit. However, you may have a few significant investments you may want to make, in which case a loan could help you. Here are the most common situations that call for a loan:
- Investing in your business
- Debt consolidation
- Buying a house
- Purchasing a new vehicle
- Managing your medical costs
- Substantial miscellaneous expenses
- Education fees
- An extended holiday trip or vacation
Which documents are required when you apply for a loan?
If you want to avail a loan, you mainly need documents that serve as proof of identity and address. You may utilize the following documents as your identity proof:
- Biometric Residence Permit
- Your driver’s license
- Your passport
Be sure to use any of these documents as proof of location:
- A UK credit union statement
- HMRC Tax Notification
- One of your latest utility bills
- Your benefits entitlement letter
- Driver’s license
- Your current tenancy agreement issued by a solicitor
However, keep in mind that you are not allowed to use the same document to prove your identity and verify your address.
What types of loans do you have at your disposal?
There are several types of loans in the market that you can look up. However, we shall discuss two types – Unsecured and Secured loans
You can apply for these loans without having to put your assets on the line as collateral. Pledging collateral means you have to place an asset on the line to secure the loan you are availing.
With unsecured loans, pledging assets like your house or vehicle as collateral is not required if you are unable to repay the loans. However, you need to have a stable source of income and an excellent credit history to avail a loan like this.
Unsecured loans have a variety of crucial benefits that make them an appealing option:
- Simple application process. Applying for these loans is no problem. You may do this from your house and not concern yourself with visiting the office for the same. You will be notified of your application status 24 hours after you submit your application. As discussed, your chances of securing this loan will depend on your income source and credit score.
- No need to pledge collateral. As you know, you are not required to pledge collateral, which is largely why these loans are popular. If you cannot make timely repayments, your bank may not take your assets to compensate for the loan amount they lend you.
However, unsecured loans come with a few demerits. Here are the main ones:
- Relatively higher interest rates. Since you do not have to pledge collateral, banks tend to charge relatively higher-interest rates of interest as compensation. In other words, you are required to make more repayments than you would if you availed secured loans.
- They are not easy to secure. Unsecured loans are not easy to get your hands on. You are required to show your bank that you have a stable source of income and a solid credit score.
Secured loans are the exact opposite, which means you have to pledge collateral. Your lender will hold on to the asset until you repay the entire loan amount. Secured loans are commonly used. As you know, you will need to place an asset to get the loan. If you are unable to the loan amount, the lender will take the asset to recover the lent loan amount.
Secured loans come with their fair share of advantages and disadvantages. Here are two advantages:
- You have the option to reduce your repayments and pay them over a longer tenure. While this may help you in the short-term, you will have to make overall higher repayments since the interest will go up over the tenure.
- You may use your secured loan to handle just about any expense, as long as it is legal. However, you might have usage restrictions if you are planning to raise more funds via a remortgage.
Here are a few demerits of secured loans:
- As you know, you could potentially lose your house or any other asset you pledge as collateral. This is the major downside to applying for a secured loan. In other words, you cannot risk missing or making delayed payments on your loan.
- Secured loans are generally low-interest rates. However, they are also variable. As the name suggests, the interest rates could go up at any time since they are variable, which is a factor you need to account for when you make repayments.
There are several options in the market for credit cards and loans. You could opt for low interest credit cards. If you have a bad credit score, you could apply for loans for bad credit.