Covid-19 has pushed millions of Brits into financial peril, and many have resorted to cutting back on essential spending (33%) or taking on more debt (16%) to deal with it, according to a report published on Forbes.–
But 2021, referred to by many as ‘the year of the loan’, has seen many Brits take out loans for other reasons. Rather than borrowing to keep up with basic expenses and cover bills, Brits turned to loans to indulge some more personal wants.
Borrowing grew significantly compared to last year
Research from established lender Evolution Money shows that the number of loans taken out has grown by over 40% since this time last year. The loan amounts themselves have also grown. Brits are now taking loans that are 31% higher than those they were taking just a couple of years ago.
In January 2019, the average loan taken out was £13,000. Last month, it was £27,000.
What are Brits borrowing money for?
Despite the impact of Covid-19 on the economy, the top reasons for borrowing money this year has had nothing to do with basic needs. In fact, according to Evolution Money, the main reason for taking out a loan has been to buy a new car.
Tied in second place are loans to help with a house move and to pay for a new qualification that could help boost future earnings. Tied in third place are loans for a holiday or home renovations. A smaller percentage of Brits have taken out loans to cover the cost of Christmas.
Millennials (25-34-year-olds) are borrowing more money for non-essentials than anybody else. This includes going on a holiday or buying Christmas presents. Older generations have been just as likely to indulge themselves with their loans, but their choice has been to tick something off their bucket list or make home improvements.
Should you go into debt for non-essential items?
“Taking out a loan is not something to be taken lightly and must always be done responsibly,” says Hannah Dearden, operations marketing executive for Evolution Money. “For those who do their research and are confident they can pay the money back, a loan can be a positive decision for people to make.”
Still, taking out a loan is always a risk, especially in uncertain times.
Before you take out a loan
Take a good look at your finances before you borrow money for something that is not essential. If you don’t have an emergency fund in place, have high debts or are in an uncertain situation because of Covid-19, borrowing money for something like a car might not be the best choice.
Look for the right loan
Even if you feel you’ll be able to afford the monthly repayment, spend some time shopping around for the best possible interest rate. And don’t let lenders push you into taking a bigger loan than you need.
Check your credit score
Your credit score will impact not only loan approval but also the interest rate you’re offered. If your credit score is poor, spend some time working on it before you apply for a loan. Reporting mistakes on your credit report and repaying existing debt can significantly improve it.
The post More than 1 in 4 Brits took out a loan in 2021 – but not for the reasons you think appeared first on The Motley Fool UK.
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