How do secured loans and payday loans work? Do you understand different loans? Read our post to find out which sort of loan is the best loan for you!
This article will explain how do payday loans, secured loans and unsecured loans work? In today’s day and age, there are hundreds of companies offering you different types of loans. Sometimes, it can be obvious which type of loan is the most suitable to your needs. For example, you normally take out a mortgage to buy a house. However, sometimes, the options are just overwhelming!
- What are secured loans?
- Unsecured loans – what you should know:
- What is an instalment loan?
- Why might you fall behind on your payments?
- What are the consequences of non-payment?
- Secured loans vs unsecured loans – what are the advantages and disadvantages?
- Why a person might have difficulty repaying loans
- Consequences of non payments
For example, you need to cover an urgent car repair, which will cost you £400. Should you borrow £400 and pay it back on your next payday? Alternatively, you could opt for a loan that is to be repaid over 3 months? Maybe the best thing to do is borrow £200 from two different companies. Perhaps a secured loan is good. Or how about short term loans? Perhaps you shouldn’t borrow at all, but just save up and travel by public transport instead! Obviously, saving up would be like jumping from the frying pan and into the fire. By the time you have saved up enough, you’ve burnt an extra load of cash on travel expenses! Let us examine different types of loans in order to understand this better. All types of loans fall under two categories:
Secured credit means you pledge an asset as collateral. The creditor can confiscate the asset should the customer default on the agreement. This type of credit is generally obtained over a longer period.
The most common type of secured loans is a mortgage, which is a type of instalment loan. An institution gives you a large amount of money to buy a house, and you need to repay them in monthly instalments until you clear the debt. This loan typically spans over 10 to 50 years. Should you fall behind on payments, the mortgage-provider reserves the legal right to confiscate the house and sell it to recover the debt owed. This type of instalment loan is now considered the normal way to buy a house.
A type of secured lending that frequents most local high streets is pawn broking. Pawnbrokers allow the customer to hand over a valuable of their choice. The broker will then give them a sum of money close to the value of the item. Once the customer has enough money to repay the broker, they will receive the valuable item back. Obviously, if the plan fails, the broker gets to keep the valuable item to compensate for the lost money.
Unsecured loans are money loans that have no collateral assigned to the borrower’s assets. Some types of unsecured borrowing include credit cards, personal loans, bank overdrafts, corporate bonds, subsidised loans, or peer-to-peer lending. Secured loans typically span over a shorter period.
In the United Kingdom, interest on all loans come under the Consumer Credit Act 1974, and are regulated by the FCA. Nevertheless, unsecured loans have a considerably higher rate of interest applied to them. This is because the lender is taking a bigger risk in lending to the customer. There is no guarantee that the customer will repay. In the case of default on an unsecured loan, the creditor will have to take the debtor to court, obtain a judgement against them, and then enforce it. Even this cannot assure the creditor that they will regain the money.
The most common type of unsecured borrowing is a bank overdraft. This is easy to set up and has very low interest rates. Personal loans also fall under this category, a type of which we will discuss in this article. Instalment loans are offered under both categories of secured loans and unsecured borrowing. Some instalment loans can last for years, such as a mortgage. In this article, however, we will focus more on personal loans that are repaid in instalments.
As the name suggests, an instalment loan is a loan that you borrow, but repay in instalments. This means that although you obtain a tidy sum at the start of the arrangement, you can repay the loan in bite size portions, making it easier for you to handle. You must be aware; however, that you will pay a little more interest. This is because you have the money for a longer amount of time.
The repayment amount is subject to the terms and conditions of the lender, and the additional costs vary widely. In order to accommodate the need to calculate monthly instalments on an instalment loan, online loan calculators can be found on various websites.
Who offers personal instalment loans?
Over the past year, with the introduction of the new FCA regulations, many companies have rebranded themselves as short term lenders offering short term loans, that are repaid in instalments, rather than payday lenders. This may have been the cause of the serious decline in the use of payday loans over the past 18 months. City Watchdog has been quoted saying that they have estimated only 3 or 4 payday lenders will eventually remain, compared to the 400 open now. This follows a crackdown on payday lenders in an attempt to protect the public, after many consumers struggled to deal with their sky high interest rates. In May 2015, a mum from Woolhope even pleaded guilty to stealing money from an employer, after she found herself struggling to keep up with repayments of payday loans.
The Telegraph already reported that one lender offering payday loans, The Money Shop, intends to start offering different prices and loan lengths to borrowers, subject to their credit and affordability assessments by the summer of 2015, and many companies are following suit.
Why should you get an instalment loan?
Rather than the old method of repaying the entire amount in one lump sum, an instalment loan is easier to pay off. Take the example given above: You can borrow £400 from a short term lender, then, instead of using half of your next salary to pay it off, you will need to repay it back in smaller amounts. So you get immediate gratification, as well as finding it easy to maintain your monthly payments – the best of both worlds.
Disadvantages of Instalment loans
The main advantage for the customer is ironically the main disadvantage for the lender. That is the period of the loan repayment. As the loan life extends, the risk heightens. You see, life has its way of taking on unexpected turns of event. This could be a break-up, causing the customer to lose their partner’s income; it could be a surprise redundancy. It could even be a natural disaster that will force them to spend a lot of money on recovery. The beauty of life is that it is unpredictable, but that can sometimes also be its biggest crime.
Luckily, these situations do not occur too often. Moreover, lenders have been clued in as to these types of sudden circumstances when training, so should be very understanding. Be aware, however, that most responsible payday loans direct lenders – such as Cashfloat – will ask for written proof of a big life changing event before freezing the interest on the account.
More disadvantages of instalment loans
However, every coin has a flipside. The main downside of instalment loans is that, despite the convenience, the interest paid is slightly higher (although not by much, thanks to new FCA caps in place).
Another disadvantage may be the constant weighing on your moral conscience, telling you that you owe someone money. No one likes to feel that they owe anyone anything, especially not money. There is no better feeling than being debt free! I mean, just think of the day you pay off your mortgage!
Working out the interest on an instalment loan
To be honest, there are so many different variations of instalment loans. They vary from many different amounts to multiple period choices. When researching for the correct lender for you, make sure that you are aware of the interest rate per month. Then, you can use an online loan calculator to work out your monthly repayments.
A hot topic on the news recently has been discussing how instalment loan providers were found to be adding hidden fees and charges to compensate for the new FCA cap. Make sure that you are aware of ALL fees and charges that will crop up during the life cycle of your loan. If you are unsure of anything, call the company up to clarify. This will also help you feel more secure about the company who you are paying money to, as you will have started to develop a personal relationship with them.
When falling behind on loan repayments, there is no blaming it on the dog. Everyone should ideally take responsibility for their loan repayments to avoid damaging their credit report. Of course, there are many legitimate reasons why you might fall behind on a loan repayment. Here are some examples:
Losing your debit card or having it stolen is normally not under your control. If this happens, make sure to contact any company that is due to debit payments from that card to let them know. Then, when your new card arrives, you can update them on the new card details and avoid defaulting on any of your payments. If, for some reason, you cancel your card, make sure to follow the same procedure.
You might just forget that you have a payment going out of your card. Many people tend to move their money into savings, or another bank account, as soon as it comes in from their employer. Make sure that there is always enough money in your account that your card is linked to. This will ensure that payments to go out without any issues, for secured loans or unsecured loans.
How many of us agree to a payment going out on a certain day, thinking, ‘That’s fine, I will definitely have money then’. The next thing you know, you have overspent because of a friend’s birthday, or a day out with family etc. To avoid this, and ensure you can cover secured loans or unsecured loans that you may have taken, make sure that when your salary comes in, you siphon off any money that you need to pay out that month. Make sure that you do not default.
If this means living a slightly less glamorous life for just one month, it is worth it in the long run. After all, no pain no gain! If, however, you were not prepared enough, and the money is already gone, the best thing to do is contact your creditors immediately. Inform them of a date when you have more money coming in to cover the full cost of either the secured loans or the unsecured loans.
Falling under financial pressure is not as farfetched as you might think. All it takes is one unanticipated bill, an emergency repair, or a month of careless spending. If this happens, you need to evaluate your income and expenditure carefully. Assess how much disposable income you have available. Once you have a clear picture, you can work out how much you can afford to pay monthly to each of your outstanding creditors. The next thing to do is write to your creditors letting them know of your current situation. Ask them to accept your new offer when paying off secured loans or unsecured loans. At this point, most of your creditors should agree to freeze the interest on your loan from accruing, and set up a new, customised plan.
It is important to know that in the event that your situation is too difficult to handle, you can seek advice from impartial third party organisations, such as Debt Management Companies, or The National Debt Line. If necessary, you will be advised to set up a Debt Management Plan where the Debt Management Company involved will take charge of your debt for you, and pay your creditors for you on a pro rata basis. One such free organisation is Stepchange debt Charity.
Life changing situation
A rare, but possible, situation that can occur is that an unprecedented life changing circumstance can occur. This can cause you to stop making your regular payments. These can include, but are not limited to a severe illness, redundancy, a natural disaster or even a death in the family. All of these will cause you to stop working immediately – thereby, stopping your income. In these situations, it is important to inform your creditors immediately of your circumstances. Ask them to freeze your interest so that you can review your situation and let them know when you can recommence payments. Your creditors will normally be very understanding and agree to review your account in a month or two – giving you some breathing space to re-assess your finances. Some responsible lenders will ask for proof of your situation.
If you are uncomfortable with notifying your creditors of your inability to pay on the pre-agreed date via telephone, you can do so via email or sometimes even by sms. This avoids awkward confrontations, as well as gets the job done. You must be aware that failure to notify your creditors of your incapacity to pay can result in more serious consequences than you might have first thought.
Consequences of non-payment
Most companies will undoubtedly try to contact you tirelessly to try to discern the reason for non-payment, regardless of whether you’ve taken secured loans or unsecured loans. This can be both annoying and inconvenient. In the event that they cannot contact you, some companies will choose to exercise their legal right to take you to court in light of your contractual breach. Thereupon, they will apply for a CCJ, which will show on your credit file. Potential lenders may take this as a sign that you do not deal with your debt responsibly, and may result in unwillingness on their part to lend to you.
Following the obtaining of a CCJ, a company can enforce the CCJ in one of 4 ways:
This is probably the most common way of enforcing a CCJ. If you obtain an attachment of earnings order, this will ensure that your creditor gets a chunk of your salary before it even gets to you. Aside from making you feel that you are not in control of your finances, this may also prove embarrassing. This is because your debt is no longer a private matter, but becomes known to your workplace too. Furthermore, if your employer does not comply fully with the court’s order, they can be summoned to court and get fined. As this presents the employer with yet more complications, your employer will not be so happy with having you employed by them.
An attachment of earnings can be suspended, provided you fill out the forms mailed to you correctly. It is strongly suggested that you send your post by recorded delivery to ensure that the court receives it in good time.
Your creditor can also request a warrant. The court will then instruct you to pay off your debt within 7 days. Failure to pay will result in bailiffs coming round to your home or business and seizing property that they will sell at an auction to cover the debt owed. You can also suspend a warrant with the consent of the creditor.
This is when your creditor applies for the money in your bank account to be frozen. The money owed to them is then withdrawn from your account. To avoid you taking the money out before your creditor, you will only receive a copy of the order once your account is already frozen.
This prevents you from selling any of your assets before you have paid your creditor. This type of order does not normally take money from you immediately, but can be inconvenient when you finally want to sell an asset.
The creditor will pay for all court fees, but then add it to the debt owed. It is advised to comply with all court orders to avoid being fined.
Conclusion – which loan is best for you?
Overall, instalment loans, whether secured loans or unsecured loans, are a useful option for consumers looking for emergency cash, but cannot afford to repay it in one lump sum. Make sure you fully understand the full terms of condition of any loan before signing the Consumer Credit agreement. Also make sure to work out your exact repayments using an online calculator, calling the lender to confirm – if necessary.
In the event that you cannot make a payment, it is best to contact your creditors immediately. Failure to do so can result in uncomfortable consequences.
We hope you found this article about looking beyond payday loans informative. For more guidance and tips, you can read some more articles on our website written in easy to read terms. Happy borrowing!