29 Mar What is a Loan and Why Take One Out? Pt1
Part 1 – What is a Loan
There are many reasons to take out an unsecured personal loan and we here at Badger Loans are going to give you five of the best. Before we do that let’s get stuck into what loans really are. When you start looking for finance one of the first things you’ll notice is the sheer volume of different names for what seems to be different types of loans.
What’s In A Name?
You’ve got payday loans, unsecured loans, personal loans and loans without a guarantor. Then there’s short-term loans, instalment loans and CCJ loans not to mention emergency loans too. What do they all mean? Are they really any different from each other? The short answer is no. We believe that a loan is a loan. There’s no such thing as ‘payday loans’ but you could get a short-term high-interest finance arrangement. Do ‘instalment loans’ really exist? Only in so far as every single loan on earth is an instalment loan if you’re paying it back in more than one lump. How about a ‘loan without guarantor’? Every loan ever written (loans are underwritten) is a loan without a guarantor unless it’s a ‘Guarantor Loan’. This is typically an unsecured personal loan secured against another person instead of bricks and mortar, solid collateral.
Why So Many Names?
So what do all these names mean that you keep seeing on the internet and in bank ads etc? Well, primarily we’re human beings and as such we like to label things. Especially as we like to be able to differentiate one thing from another. So, one reason for the proliferation of names for loans is to mark out one from another in order to guide you, the consumer. The other reason is marketing. In fact, that’s the main reason. Having just told you there’s no such thing as a payday loan you’d be within your rights to ask just why we have a section for payday loans on our site and a channel to apply just for them. Because you’re expecting to see one is the reason why. If we didn’t have a clearly marked payday loan channel people would very quickly click away and go somewhere else.
The Financial Conduct Authority (FCA) define a payday loan as a loan under £1,000 running for under 1 year with an APR above 100%. They were initially designed to be repaid in one lump but things changed pretty quickly. They became extremely popular and lenders realised they could make a fast buck selling short term loans at high-interest rates. Now they’ve been brought to heel with a maximum interest rate and a raft of measures designed to protect the consumer. Payday loans are not the beast they used to be. They are still worth avoiding unless you’re using them as a last resort. Something truly immediate like a broken boiler or a blown head gasket.
We’ve ascertained what a loan is and that there’s no difference between them apart from the amount, duration and interest rate. Now let’s get onto the fun part and that’s the reason for taking one out in the first place. Which of course is no fun at all if it’s for the aforementioned broken boiler. There are almost as many reasons for wanting to borrow money as there are names of loans available and that is the focus of part 2 of this blog post.