From debt consolidation to home improvements, people take out loans for all sorts of reasons - and we’ve covered five of the most common.
The decision to take out a loan should never be one that’s taken lightly, and everyone has their own reasons for wanting to lock one down. So, in this article, we’ll be taking a look at just that: why people usually take out loans.
But first, let’s take it back a step. Because the reason doesn’t necessarily justify the means.
Don’t rush, whatever the reason
A loan is by no means for life, but it’s still a concrete commitment. That new set of wheels or lavish wedding might seem like the be-all and end-all now, but will you still feel the same when you’re paying it off long after the event’s passed?
We’ll knock the negativity on the head soon - we promise, but it’s important to stress that if you’re financially over-stretched as it is, it’s highly unlikely a loan is a financially savvy choice for you right now. And so, if you can, you should avoid taking one out until you’re absolutely confident you can afford the repayments for the duration of the loan’s term.
Now that bit’s out of the way, let’s take a look at some of the common reasons people give for taking out a loan.
1) DIY projects
Lots of people take out loans to finance home improvement projects - like adding an extension, instating a conservatory or renovating their kitchen, for example.
The beauty of taking out a loan for this reason is that you’ll likely get a return on your investment when it comes to selling your property - if you own it and you ever plan on selling it, that is!
More often than not, personal loans are used for this kind of project. Personal loans let you borrow anywhere between £100 and £25,000 (depending on the lender) and are typically repaid over around three to five years (again, this will vary from lender-to-lender).
If you’re looking to take out a personal loan to fund DIY projects, certain things, like your credit history, employment status and salary, will affect your eligibility.
From the venue, catering and dress, to transport, decor and rings, when it comes to weddings, there can be a lot to fork out for, and not everyone necessarily has the cash lying around to pay for it up front; hence the appetite for loans.
Although it’s only natural to want your big day to go with a bang, it’s important to spend sensibly when planning your wedding, and only borrow what you absolutely need to.
When you’re paying different merchandisers left, right, and centre, it can be easy to get carried away and lose track of how much you’re spending. For that reason, it’s perhaps a good idea to set-up some sort of spreadsheet where you can monitor how much is being spent, who to, and when.
3) Debt consolidation
Another common reason for taking out a loan is to consolidate debts. If you owe money to multiple lenders, keeping up with different payment dates and interest rates - while trying to budget - can soon become stressful.
With a debt consolidation loan though, all that faff and confusion can be streamlined into one payment, to one lender, with one interest rate, and on one date.
There are two types of loans people commonly consider when looking to consolidate debts, and they’re personal debt consolidation loans and secured debt consolidation loans. These do have their downsides though and could end up costing you more in the long run – so it’s important you do your homework!
4) Buy a car
Buying a new set of wheels outright isn’t cheap, and without years of saving can be an unrealistic cost for many; enter a personal loan.
Although there are other car financing options available, like personal contract purchase (PCP) and hire purchase (HP), each come with their own pros and cons, and for some, personal loans are the most attractive option.
5) Making ends meet
The fifth and final reason we’ll look at is simply making ends meet. However, this one comes with a massive caveat.
Whether it’s to keep up with the rent or mortgage, afford your gas or electric bills, put food on the table or finance getting around (i.e. public transport or fuel), there are a lot of people who resort to a loan to tide them over.
However, if you’re already struggling to cover day-to-day expenses, it’s unlikely that taking out a loan is a sustainable and sensible option. Doing so can stretch your finances further, and put you under increased pressure in the future when it comes to meeting your monthly payments.
If you’re thinking about taking out a loan to help make ends meet, it’s certainly worth exploring other options first, like:
Contact the provider of any bills, proactively inform them of your situation, and see if there’s anything they can do to help.
- Take a step back and evaluate and prioritise your spending. Are there any areas, that aren’t an absolute necessity, that you can cut back on?
- Seek help. There are a number of not-for-profit organisations out there - StepChange, National Debtline and CCCS (Consumer credit counselling service) are just a few.
Disclaimer: All information and links are correct at the time of publishing.