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How To Use A Loan Wisely Infographic

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Let’s start with basic loan terminology:

SECURED – a secured loan is loan that is connected to one or more of your assets. For example, if you are unable to make your payments the lender may take your car as compensation. On the other hand, an unsecured loan isn’t attached to any assets.

APR – APR stands for annual percentage rate. This percentage represents the amount that you will owe after a year compared to the original sum you borrowed. This number includes the interest you may accumulate and any additional charges you may incur during this time.

PPI – PPI, or payment protection insurance, is a type of insurance that will compensate you if you’re unable to make a payment.

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What Is A Short Term Loan?

A short term loan is an unsecured loan of a small sum that has high interest. Short terms, quick loans and payday loans are all quite similar in the way that they work. These loans are meant to be paid back as soon as possible, usually within 12 months or less. In 2015, the average payday loan was £260 and nearly all loans were for £1000 or less.

Most people take out payday loans online, with 83% using online lenders, 29% using high street lenders and an overlapping 12% that have used both.

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Why Take Out A Short Term Loan?

Most people use short term and payday loans to get them out of difficult financial situations and tide them over until their next payday. 38% of payday loan buyers in a UK government survey reported that they have bad credit, 52% of payday loan buyers said that they took out a loan because of an unexpected increase in their expenses and 19% said they needed the loan because of an unexpected decrease in income.

53% of payday loan buyers in 2015 used the money for living expenses, 10% used the loan for vehicle and travel expenses, 7% used it for clothes and household items.

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How to use Payday and Short Term Loans Wisely Part 1

A wise way to spend a payday loan is to pay it back quickly and improve your credit score. Last year, the national average credit score was 381. Clearscore’s credit score calculator, that calculates a score between 0 and 700, was able to calculate the average credit of certain areas around the UK.

South East London – 361.15 (the lowest average credit score)
Manchester – 374.62
Liverpool -382.62
West London – 398.94
Cambridge – 439.39
Bath – 445.4
Kirkwall, Orkney Islands – 453.68 (the highest average credit score)

A bad, or even a ‘fair’ credit score might mean that the interest you generate from large loans is a lot more than it would be if you had a good credit score. Sometimes your interest could even be as much as ten times more than you would be paying with a good credit score. Or, it might mean that you won’t be able to get a loan at all.

By taking out a small payday loan and paying it back on time or as early as possible, you will be boosting your credit score, which will improve your chances of being approved for a more substantial loan later on.

 

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How to use Payday and Short Term Loans Wisely Part 2

One of the most common reasons people take out payday loans is to resolve a household emergency or urgent need. This may be as a result of changes in regular expenses, the borrower facing difficulties that prevent them from meeting the general cost of living, or the appearance of unexpected expenses. People need payday loans to fix broken facilities in their home, pay for food and electricity, and pay for transport. Spending a payday loan on luxuries is unwise because your will be incurring interest while saving up to pay it back. A payday loan should be used to help you earn money and get back on your feet rather than be spent on things you can’t normally afford.

A wise way to spend a short term loan is to quickly fix any emergencies that might prevent you from earning your usual cost of living. A payday loan will get you back on your feet and keep you from suffering through emergencies and generating bad credit scores.

Tips For Taking Out A Loan

Take out only what you need and what you can afford to pay back. Make a spending plan and stick to it. Avoid taking out a loan to spend on luxuries. In 2014, 1.4 million people used payday loans for their Christmas shopping because they didn’t plan ahead. Don’t skip your payments. Don’t spend what you don’t have to spend. Avoid becoming dependent on payday loans.

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Hilton Freund
Hilton is managing director at Wizzcash. He regularly blogs about personal finance, technology, lifestyle and more - as well as riding his bike.
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How To Use A Loan Wisely Infographic