Throughout the course of a lifetime, there’s no doubt that you will have relied upon credit or a loan at least once or twice. Data shows that the millennial generation and those that come after them are less financially literate than those of us that may be entering our sundown years and enjoying all our wisdom. However, contrasting reports from Age UK indicates that there could be an increasing debt problem in people over 50 in the UK, despite the same study finding that 50+ people are less likely to use credit than any other demographic eligible.
This article looks at the most cited reasons for taking out a loan, with the aim of discussing the feasibility, affordability and frivolity of each option. Taking out loans is nothing to be scared of, as long as your finances are under control. Lenders are required to perform affordability checks today and were not subject to strict regulating criteria years ago. This means attitudes towards taking out a loan could be largely outdated. The things you really need to know, including the most appropriate loan type could also be largely outdated.
1. Emergency financing option
Emergency situations pop up throughout our lives and no matter how old or how wise we get, we cannot account or prepare for every little thing that is likely to crop up. It could be anything from adverse weather conditions that makes a pipe burst, car repairs you were not expecting and broken boilers. These things are just unavoidable and are all time sensitive. That means when your money is tied up or you simply do not have the funds available to deal with an urgent situation, you can turn to a personal loan for your emergency and for life to continue without too much interruption.
For the older generation, this could also be an extremely safe and manageable way of coping with an emergency. If your money is tied up or you do have to live month-to-month on pension cheques, this kind of loan can be factored into your monthly budget moving forwards. You can customise the loan request to ensure you keep a cap on your outgoings and do not over commit or over borrow, which can be dangerous.
Personal loans, particularly for those who have worked hard to establish a good credit score throughout their lives, can be very affordable. They can also be spread over a time period that you are comfortable with; you can decide if you want to get the payments over and done with or spread them out so they are cheaper. It is worth noting that spreading your payments over a longer period will make the loan more expensive in the long run.
2. Debt consolidation
Using a debt consolidation loan is clever way to manage your finances. These loans allow individuals who have multiple outstanding debts to ‘buy’ their own dues and essentially transfer all the money to one creditor. This could be a suitable option if you are one of those over fifties struggling with managing your debts. Alternatively, if you have built up credit over your years, this could also work out to be really quite cheap.
The interest on a debt consolidation loan could seriously vary, as some lenders will look at an applicant who owes to multiple places suspiciously. It is possible to get a dedicated debt consolidation loan or simply use a personal loan. The important thing to remember is that the loan amount will have to be big enough to pay off all outstanding debts, or the method is not effective and could end up costing even more than if you were to leave the original loans to reach their full term.
The biggest advantage of a debt consolidation loan, and one of the main reasons they are likely to be requested, is because it makes debt so much tidier and easier to manage. Only owing one creditor means there is only one outgoing payment which is much easier to keep track of. This helps to reduce the risk of missing or forgetting a payment. With several dates, sums and in goings and outgoings to keep track of, you are at risk of harming your credit score by missing a payment.
Forgetting payments could be a real concern of individuals, especially as they age, as it is always the borrower’s responsibility to ensure enough money is in the account to meet the repayments. A debt consolidation loan can be set up on the most convenient day for you. This could be the day after your pension comes in, so you are confident there is enough money in the account to cover your costs, before you’ve paid for anything else.
3. Events and celebrations
One of the great joys of aging is being able to take a philanthropic and involved role in your loved one’s lives. So many people decide to take out a small to medium sized loan to contribute towards a wedding or a large celebration, like a family reunion. This is such a lovely and kind hearted thing to do.
However, it is important that over 50s, and especially those who do not have an active income (a pension is considered a passive income), only take out loans they are realistically able to afford. Disposable income for retired people is quite low and pressure to pay for things like your child’s wedding could put you in a harmful financial cycle or in a situation where you need to depend on help from someone else in the future.
4. Home improvements
It’s no surprise that home improvements are one of the most common reasons someone would take out a loan. With renovations, redecoration and changes to the home varying in price so much, sometimes a loan is necessary.
These changes are not necessarily frivolous or purely cosmetic either, necessary home improvements might just have an upfront cost that you simply do not have the available funds for (or it will just leave you without the financial cushion you are comfortable with). This could be anything from damp proofing and eradicating mould from your family home, to changing the windows and doors in your home to ensure it is as efficient as possible or simply upgrading your kitchen or bathroom so that it is better suited for your changing mobility and requirements.
To cover the costs of home improvements, especially the more expensive ones, many people opt to take out a homeowner loan. This is different to a personal loan because it is secured, which means equity within your property will be tied into the agreement. This does make it riskier, but the biggest benefit is that you could borrow more money. If you are only looking for a smaller amount (anything below £10,000), a personal loan might be a safer way to borrow.
5. To cover the cost of moving
The cost of moving is extremely high, there are so many variables. With the price of housing being what it is, it’s no surprise that people need to seek loans to help them through the complicated time. For many, it’s just so much more convenient to have the money you need to pay for services to come in and handle things for you, rather than take time off work or have to rope in volunteers to help you out. As we get a little older, this might be the only option, too, especially if mobility is waning or becoming a little painful.
A loan to cover the cost of moving wouldn’t need to be too much. £2000 – £3000 could just give you the cash injection you need to transition comfortably. A personal loan is a suitable loan option for this cost.
6. Unplanned & planned medical expenses
Medical expenses typically fall under the emergency funding category, but there could be greater costs involved in an incident or a situation. For example, many people fail to take out accurate or comprehensive travel insurance that covers the cost of an accident abroad. Moreover, sometimes insurance just doesn’t cover the full cost of the urgent care you, or your family may need.
However, medical expenses are not one of the most common reasons Brits take out loans without factoring in cosmetic surgeries. Sometimes when the NHS is unable to cover the cost of some kind of care or someone feels it is necessary to get a procedure, they rely on a loan to cover the costs.
7. Paying for a car
There are so many financing options when it comes to buying a car. Taking out a secured or unsecured loan are both the most popular, and the most affordable. This is particularly true if you have managed to build up a prime credit score.
Using a personal loan to buy a car means that the vehicle immediately belongs to you. However, if you decide to use a secured loan, the vehicle could belong to the creditor until the total amount payable is all paid off. Yet, this could be a slightly cheaper means of financing because the risk of the loan has been offset or ‘secured’ by the asset of the car. The risk is that the finance company or creditor could make a claim on the car if you default.
The disadvantages of using a loan to buy a car are extremely minimal, which is why it is so popular to pay this way. Moreover, alternative means of financing cars, such as hire purchase and personal contract purchases have so many caveats, restrictions and fees that they are falling out of favour with all generations.
8. Purchasing luxury items
Undoubtedly, this is a frivolous reason to take out a loan. All financial products are a serious commitment and should not be used for a luxurious purchase. In fact, so many financial institutions, from traditional banks to payday loan direct lenders, will advise against buying luxury or frivolous material items with a loan. Yet, some luxury items could be considered an investment, which might make a loan a little more reasonable.
9. To help improve your credit
With large financial products, such as a mortgage, becoming harder and harder to obtain, consumers are becoming more conscious about their credit score. This means many people are now committing to tactical borrowing. They are likely to take out a personal loan to buy something large, (like a car), even though they could have financed it themselves. Alternatively, buy now pay later lending schemes direct from retailers are also on the rise. Many young people take out these financial products, extremely confident they can meet the repayments with ease, some even intending to pay off the borrowed money early, simply to show future creditors that they are responsible and trustworthy borrower. This exercise will incur some fees, especially if you are intending to repay a loan early.