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How not to use a loan
While taking out a loan is something you need to give considerable thought, it can help you to manage the cost of big expenses, provided that you borrow responsibly. But what is a good reason to take out a loan, and could there be another form of credit that would be more suitable for your situation?
The most responsible reasons for taking out a loan are to cover big purchases that you wouldn’t otherwise be able to afford, such as for a car or home improvements. It will be cheaper to save up and pay for whatever you’re buying outright, so if you can do without for a while, it may not be necessary to borrow. However, if you need a car to get to work, for example, this is a sensible reason to take out a loan.
Try to be as sure as you possibly can that you’ll be able to afford the repayments on your loan, as it could affect your credit score if you make late or missed payments, or even lead to debt problems. If you take out a loan that is secured against your property, you could also be at risk of losing your home if you don’t keep up the repayments. If you’re interested in applying for a loan, you can find out more information about the types of loans Ocean has available here.
Covering the cost of debts
If you’re making a number of credit card or store card repayments each month, you could consider taking out another loan to “consolidate” your debts. Borrowing more money to pay off existing credit still means that you’ll have to pay it back, though you would just have to make one larger payment a month, rather than a number of smaller ones. If you extend that term over which you will repay what you owe, it is important to remember that, whilst the monthly payments may be lower and more affordable, overall you will pay more in the long-run.
Paying for the bills
If you are thinking of borrowing money to cover everyday costs – such as your electricity or gas bill, rent or mortgage or even food – then it may make sense to think again. If you are already struggling to budget for your day to day essentials it is unlikely that your loan repayments are going to be affordable.
Take a long hard look at your budget and try and understand the root cause of the problem. For example, are you prioritising repaying other debts? If you have other debts that you’re trying to cover, remember that food, rent and utility bills are priority bills, so these are considered more important and need to be paid off first.
Luxuries on a loan
Going away on holiday or hosting a big party may seem important to you, and if you can’t afford the cost out of your savings, taking out a loan to cover it can be tempting. Paying for luxuries on a loan is a frivolous use of credit though, and if this is something you’re thinking about, you should consider the implications first. It might be a good idea to see if you can save up for what you want to buy instead.
For smaller purchases, it might be a better idea to use a credit card rather than a loan to pay for these. If you think you’ll be able to pay the amount off quite quickly, you could put the amount on a low interest, or no interest card, as this will be a cheaper option. Bear in mind that you should aim to pay this off before the low or interest-free period ends, otherwise the interest rate could increase, meaning that it may suddenly become much more expensive to repay.