According to the Bank of England, unsecured lending among UK consumers has sky-rocketed during the last twelve months. Including overdrafts, personal loans and credit cards, cumulative consumer debt rose by a staggering £864 million alone during 2013, which represented the strongest level of growth in April 2008. This has been a key driver of the recent economic recovery in the UK, as consumer confidence has soared and inspired expansion in the retail, manufacturing and residential real estate markets.
How to Use Short-term Lending in a Responsible Manner
With economists concerned that the economic recovery in the UK is therefore being fuelled by debt and heavy borrowing, there is an onus on consumers to become more responsible when managing their finances. More specifically, they must look to use short-term lending responsibly and in line with their exact personal circumstances: –
1. Calculate the Full Cost of your Loan
If you approach a short-term or payday loan company, your first step should be to calculate the true cost of borrowing. This not only includes the principle amount borrowed, but also the cumulative amount due once you have factored in interest rates and the length of the agreement. This will provide an overview of the amount required for repayment each in month, which in turn enables you to estimate whether this is within your existing financial means. If it is not, then the proposed loan agreement is not right for you.
2. Understand the Purpose of Short-term Lending and your Need for a Loan
While payday loans have come under fire from public bodies, they can be extremely effective if they are used in a responsible manner. More specifically, consumers should only ever consider the merits of short-term lending in the event that they need to cover an unexpected cost or repair, as this demands a one-off sum of cash that can be easily repaid over time. It should never be used to support or sustain an existing lifestyle, as this will ultimately trigger cycle of long-term debt that builds over a sustained period of time.
3. Understand the Difference between Secured and Unsecured Loans
Some people have a perception of lending that is too simplistic, especially when it comes to the distinction between secured and unsecured loans. In fact, the rising prominence of short-term lending has blurred the boundaries between secured and unsecured loans, meaning that it is your responsibility as an applicant to gather information before making an informed decision.