Money worries are on nearly everyone’s mind right now.
The global pandemic has turned life as we know it upside down. With half a million UK Firms at risk of disintegrating, businesses have halted or closed indefinitely, according to Financial Times. Workers face an enormous amount of uncertainty as employees are asked to take pay cuts, have been furloughed, or laid off.
There is little to no guarantees about where to get the next paycheck. Naturally, people are concerned about how to pay their bills and pay back debts. Many have turned to borrowing as a way to remedy their financial problems as a last resort, but some opportunities for fast cash can come at a cost. If you are looking for ways to borrow money during a crisis, here is a guide of the different avenues and their pros and cons.
Logbook Loans
These types of loans use your vehicle as collateral for repayment. Logbook loans require you to give away your car’s logbook or registration documents in exchange for cash. Even though you temporarily hand the ownership of your vehicle to the loan company, you are still able to use your car as long as you pay back the loan.
Depending on the worth of your car, you can get anywhere between £500 to £50,000. According to The Money Advice Service, some companies only lend you half of what your car is worth. These loans are considered a quick ways to get cash. Most companies can transfer the money to your account quickly, for a fee of up to 4 per cent of the loan.
Payback agreements depend on the company you borrow from. Most require you to pay back the loan within 78 weeks. Sometimes it’s just the interest charges until the final month of the contract when you’ll have to pay the amount you originally borrowed. The normal annual percentage rate, or APR, for logbook loans usually falls at 400 per cent or higher.
Before you jump into a logbook loan here are a few things to consider, says The Money Service:
- As with any borrowing option, there is a cost associated with attaining quick cash. If you are not able to pay back the loan, the logbook loan lenders can seize your vehicle.
- The vehicle must legally belong to you with no finance outstanding on it and valuing over £500.
- Because the interest rate is so expensive, most of your repayment will be on interest. It could be hard to pay back what you actually owe. If possible, try to pay these loans back quickly, but not too quickly. There might be extra charges on early repayment if you repay more than £8,000 in a 12-month period.
- It can be hard to track how much you owe as lenders might ask for weekly payments and you may not be able to pay some lenders using direct debit.
- How much money you get depends on the value of your car.
Payday Loans
These types of loans, also known as cash advances, lend small amounts of money no more than £1,000. Some lenders have a maximum amount they can loan. Repayment is due normally two weeks after borrowing and typically must be paid off in one payment including service fees and interest. Though they are easy to get, the APR runs high.
Credit Card Cash Advance
This type of loan can only be accessed if you have a credit card. It calls for you to withdraw cash on your credit card. A cash advance on your credit card not only includes taking money out of your bank’s ATM, but also includes buying foreign currency and traveller’s cheques, gambling and betting transactions, as well as electronic cash transfers, according to USwitch. The cost of a cash advance depends on how much money you take out. Its APR can be as high as 50 per cent. There are also fees charged by your bank for taking a credit card cash advance of anywhere between 2.5 to 3 per cent. If you are travelling and you use an ATM abroad, you may be charged a foreign usage fee in addition to being charged by your bank.
Taking a credit card cash advance is a really expensive option as there are many opportunities to accrue interest and fees, but this is one of the easiest ways to get quick cash in emergencies. Here are some things to consider before deciding to take out a credit card cash advance:
- You do not get the same purchase protection as you do when buying something with your credit card.
- Though repaying the loan is more flexible and paid on a month-to-month basis, it still more expensive in the long term.
- Find the best credit card for you, making sure it charges the lowest rates and fees. USwitch says the best cards for cash advances have an APR as little as 18 per cent.
- Some cards charge a higher interest rate for cash advances on the low end as many credit cards charge a minimum cash withdrawal fee.
- To avoid being charged high interest rates, pay off your credit card balance quickly.
Personal Loans
Personal loans are also referred to as unsecured loans because they are not backed by collateral. They are loans borrowed from your bank, credit union, or online lender that is paid back in fixed payments over a timespan of two to seven years, says Nerd Wallet. The amount you can borrow for these kinds of loans is usually higher than that of credit cards.
Your APR rate is based on things like your credit score, credit report, and debt-to-income ratio. If you have a great or decent credit score, you will likely receive a low APR rate. Conversely, if you have terrible credit and do not qualify for an unsecured personal loan, you may be approved for a co-signed loan. Once approved for the loan, you can get your money the next day.
Repayment for these loans are typically automatically taken from your checking account, which greatly reduces the chances of you missing a payment.
Second Mortgage
This is a loan taken out in addition to your first charge mortgage. CNBC says a home equity loan can be taken out as a lump sum for large amounts. Because these loans typically garner large amounts of money, it has a fixed rate with a repayment period of five to 15 years, or as a home equity line of credit with a variable rate. CNBC reports the average APR on a home equity loan is 5.6 per cent.
If all these borrowing opportunities and repayment options sound scary to you, or if you are already drowning in debt because of these borrowing options, you may be in luck. According to the UK Financial Conduct Authority, you may be able to defer your debt payments for three months.
According to JD Supra, the FCA published its final guidance to support users of certain consumer credit products during the adverse economic conditions in the UK caused by the coronavirus pandemic. As it concerns personal loans and credit cards, one key aspect of the final guidance is that firms should provide a three-month payment deferral in most cases where requested by the borrower.
They have also clarified the meaning of ‘personal loan’, stating it is a regulated credit agreement, secured or unsecured. This means a guarantor loan, a logbook loan, home collected credit or a loan issued by a Community Development Finance Institution. This does not apply to business loans, high-cost short-term agreement, buy now pay later agreements, hire purchase agreements, peer to peer agreements, pawnbroking agreements, premium finance, credit card, and other retail revolving credit agreement or overdraft.
Though this is a great option to keep your head above water, it will not solve your debt troubles. The Financial Times suggests that if you are feeling anxious and stressed about your financial situation, the best thing to do at this time is to seek advice and to throw any negative stigmas around financial issues out the window. The Times reports that most bankruptcies in these coming months will be considered ‘no-fault’ failures.
If you are an independent contractor or a small business owner, the UK Government’s Self-Employment Income Support Scheme could serve as a lifeline. For those that have seen dramatic income drops, ‘Bounce Back Loans’ is designed to aid small businesses that have been unsuccessful in getting financial help from their bank. You will not have to pay back anything, including interest, for the first 12 months. The loans can be lent for amounts of up to £50,000.
As a last resort, bankruptcy could be an option. When filing for bankruptcy, all the assets that you have will be sold to pay off debts. All of your income is taken into consideration, including pensions, when determining how much you should pay into your bankruptcy. After a year your outstanding debts are written off.
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