Understanding the relationship between loans and debt
A loan is a formal, legal agreement between you and your lender. If you fail to complete your repayments on a loan, there may be serious and long-lasting repercussions for your finances and your credit rating. Here is a quick guide to understanding how failing to repay your loans can affect your financial health.
Only borrow what you can afford
The best way to ensure you can handle your debts properly is to make sure you don’t borrow more than you can afford in the first place. When considering a loan, only borrow what you need. Remember that every extra pound you borrow means more interest to repay and a higher total loan cost. Make sure you can afford your monthly repayments. You will be able to see how much each loan will cost you per month before applying, so pay attention to this during the application process. You will find that opting for a longer loan term will result in lower monthly repayments. Also consider taking out Payment Protection Insurance, so that your repayments will be covered if you become ill and are unable to work.
Protect your credit rating
Failing to make your repayments in full or on time will not only cost you money in late charges and overdraw fees, it can seriously damage your credit rating. Having a good credit rating is one of the most important parts of good financial health, and it is very important to protect it. If you have a history of missed or late payments on your credit file, other lenders will be able to see this, and it may prevent you from obtaining credit in the future. This goes for loans, credit cards, mortgages and more. It is a good idea to set up a direct debit from your current account for the monthly payment each month, so that the payment will be made automatically without you having to remember.
Loans and bankruptcy
If you fail to repay an unsecured loan in full, your lender may pursue you for the outstanding amount through the courts and you may be issued with a CCJ. You may wind up having to deal with bailiffs, and you can even be forced into bankruptcy, which is the worst thing that can happen to your credit rating.
You could lose your home
If you fail to complete repayments on a secured loan you could lose your home. A secured loan is secured against your home, so the lender can force the sale of your home in order to recoup their losses. This is a worst-case scenario, but shows why you should always think very carefully before securing any loan against your home, and why you should only ever borrow money that you are confident of being able to repay.
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