By now the word is out that unsecured lending – e.g., on credit cards, overdrafts and personal loans – jumped an annual 9.1 percent in January 2016, according to a Bank of England report released at the end of February.
Many observers look upon this increase as yet another indication of a ticking time bomb. Although at present BOE officials are saying that the increase in spending is being largely fueled by incomes, they are keeping a wary eye on matters nevertheless. In fact they seem to be fretting about the matter, if somewhat subtly.
BOE governor Mark Carney remarked that consumers are “still relatively indebted”, and that officials want to ensure that the “collective” do not “repeat the mistakes of the past of getting too indebted and then getting shocked…by movements on rates.”
He is referring, of course, to the historically low interest rates, and if you’ve been following the financial news at all you probably also know that most investors and economists don’t anticipate a rise in benchmark borrowing costs for some time. Even so, they caution, there’s no reason for irrational exuberance, for what goes down must, at some point, inevitably go up.
At present, however, low interest rates can certainly work in favor of borrowers, as long as they keep a few caveats in mind.
Choosing the Best Type of Loan
If you’ve shopped around at all for a personal loan you may have been struck by the wide and sometimes bewildering array of lenders and loans. The loan industry is very competitive, with new types of lenders popping up to contend with those old traditionalists, the banks. Choosing the best lender and the best type of loan for your situation can be a real challenge.
Many folks choose installment loans of one kind or another, as they’re often more affordable to pay back and easier on the budget than a loan that must be repaid all at once. Yet not all installment loans are created equal.
The interest rates that a lender charges is often the first – and sometimes the only – criterion which many borrowers consider when shopping for a loan, but there are other factors that need to be considered that can vary considerably between lenders.
For example, each lender sets the range of amounts of loans that they will grant, as well as the term length. Those term lengths can vary according to the size of the loan, the credit score of the borrower, and even the purpose of the loan. It is always in the borrower’s best interests to compare information gathered by an independent source, for the simple reason that lenders’ adverts, like all adverts, are designed to show the provider and its products in the best possible light.
The adverts rarely offer easily-understood information about things like hidden fees and penalties that can dramatically increase the total cost of a loan.
Even if you think you’ve decided on a lender, there’s one more thing you need to do before you fill out that loan application: make sure you are entering into the transaction with your eyes wide open. When you take out any type of loan you are taking on debt, and some things simply are not worth going into debt for, no matter how low the interest rates or how attractive the advertised terms may be.
Debt can be a useful tool or an albatross
The Money Advice Service counsels that before you borrow money, you should be clear about the difference between good and bad debt. According to the charity, a good debt is one that meets three critical criteria. It should:
- Be a sensible investment in your financial future – not taken on just to satisfy a whim or salve over a previous poor decision
- Leave you better off in the long-term – so that the total cost of the debt adds value to your finances
- Not have a negative impact on your overall financial position – leaving you considering taking on even more debt.
Some examples of a good debt are:
- Student loans, which are investments in your future earning power
- A mortgage or an upgrade to your current property that will increase the property’s value significantly, and Investing in your business or profession in a way that will increase its profits.
There are, of course, many other good debts – far more than could be listed in an article like this. But you get the idea.
It is anyone’s guess as to whether the aforementioned borrowing frenzy is a sign of a true recovery or the prelude to another financial meltdown. But you can avoid a personal financial meltdown by being a smart borrower, only taking out a loan if you really need it, and keeping your commitment to repay on a timely basis. If all borrowers adhere to these basic principles, the BOE financial stability watchdogs can rest easy, at least on the matter of unsecured consumer debt.
Featured image courtesy of Flickr | Thomas Hawk
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