March 2, 2021

What are the Best and Worst Loans during the Recession?

By : Ellie Brown

In amid of the pandemic, a lot of people are going to be without pay for a prolonged time. Just when the UK economy found a ray of hope on the horizon when life began to come back on track after lifting the lockdown, the second wave of Covid-19 smothered it.  The economy is going downhill, and people need money to make ends meet.

Due to being unemployed for a couple of months, many of you have already dipped in your savings. Studies have revealed that people are more reliant on small loans to tide over after the pandemic outbreak, but it is crucial to note that not all types of borrowing, even with lower rates, will be a bargain. This blog discusses the best and worst loans.

Personal loans

Personal loans are unsecured loans, which mean you do not have to secure a valuable asset like your home against the value of the loan. Since the risk on the part of the lender, interest rates will be a little higher.

Based on the amount you borrow, the repayment length can be over a period of between one and five years. Although personal loans can seem better because you have nothing to lose, they carry higher interest rates. It is crucial to check your affordability.

You should avoid borrowing money if there is no emergency. If you have a good credit rating, you can get these loans at an APR lower than a credit card.

Home equity loans

Home equity loans are more affordable than personal loans because they use home equity as collateral against the loan. The loan amount is based on the difference between the value of your home and the due amount of the mortgage.

These loans are generally ideal for funding significant expenses like home refurbishment, medical bill, education, and the like. These are secured loans and, therefore, more affordable than personal loans.

Payday loans

Payday loans are the worst loans to apply for during an economic crisis. Even though you are to borrow £500, it is advisable that you should not take out these loans. You may be tempted to apply for these loans because you can quickly get money, interest rates can take a further toll on your finances.

Note that it can be three times more than the APRs of other short-term loans. The repayment length of payday loans is generally not more than two weeks and must be paid in a lump sum.

You will end up rolling over the loan if you fail to pay off the debt on time, which means the cost of the loan will quickly add up because of late payment fees and interest penalties. It will also ding your credit score, making you unable to borrow money down the road.

Credit card cash advance

A credit card cash advance refers to the withdrawal of cash from using your credit card. Credit card cash advance is the worst type of borrowing because it carries very high-interest rates. Unlike credit cards, you start being charged the interest rate from the moment you withdraw money.

Interest rates for credit card cash advance can go up to 25% and sometimes more than that. Note that you will have to pay transaction fees as well. A credit card cash advance is not considered an ideal option even if you have an emergency because there is no grace period. You should build an emergency cushion instead.

Bad credit loans

Bad credit loans can be a good choice if you are going to fund unexpected expenses only. These loans generally aim at bad credit borrowers. Since your credit report is not up to scratch, these loans will carry a slightly higher interest rate.

If you apply for very bad credit loans with no guarantor and no broker, make sure the amount is not big. With a very bad credit rating, you will be able to borrow money only if you have no other outstanding debts.

When it comes to applying for a loan, you must borrow money only when there is an emergency. Since the recession period is still on and many of you struggle to have enough cash flow, you should not borrow more than you need. You should also carefully analyse your needs. Avoid borrowing money to find those needs that you can put off.

As you know, you are in a tight spot, and there is no clarity about how long it will take to bounce back. You should take stock of your financial condition. Try to cut back on your spending and do not stop stashing away money. Having an emergency corpus can help you avoid borrowing money for your small needs.

If you still need to borrow money, avoid using payday loans and credit card cash advance. These are the worst loans. They will rather throw you into a debt spiral.

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