Debt Consolidation main reason for applying for loan

Posted by Kirstie Brown in Personal Finance on 4 November 2016 - Kirstie is a Senior Credit Analyst at checkmyfile.

A recent survey carried out by Freedom Finance has revealed that the main reason that people apply for a loan is for debt consolidation, with 47% of all approved loans being used as individuals look to take control of their finances.

After debt consolidation, the most popular reasons for applying for a loan included home improvements (24%), buying a new car (17%) and getting married (6%).

Freedom Finance analysed a total of 34,578 loan offers totalling a value of £401,545,898 between January 2015 and February 2016, to identify the qualities of a successful applicant. Borrowers most likely to be offered headline loan rates were found to be between the ages of 28-37 and earning an average of £29,279 per year.

Jeff Poole from Freedom Consumer Finance says, “These figures are a clear indication of the important role that credit plays in the UK economy, with several thousand people each year taking out a loan in order to fund the purchase of a car, improve their homes or most distinctly, to streamline their finances. Many view debt consolidation as one of the best and most practical ways to handle their monthly loan repayments which can often get confusing when dealing with various loans from multiple lenders. By consolidating debts it enables consumers to have one single repayment. As consumers become more financially savvy, it is really positive to see many of them take control of their budgeting which in turn can reduce overall repayments and improve their credit rating.”

He goes on to say, “When it comes to other unsecured loans such as holidays and home improvements, consumers need to be mindful that many of the top rates advertised for their chosen loan are only available to those with perfect credit scores, but in reality, there are very few ‘perfect borrowers’. A better understanding of lenders’ criteria should help to give applicants a clearer picture of what type of loan they’re likely to be accepted for and at what rate.”

However, while the average loan application in Freedom Finances survey totalled £11,612, borrowers now have the option of applying for more. First Direct are now offering unsecured loans of up to £50,000, which is fuelling fears that Britain may be heading on another credit binge. This compares to the banks previous maximum limit of £30,000 and leapfrogs lenders such as Sainsbury’s (£40,000) and Tesco (£30,000). It is likely that other lenders will shortly follow suit, which critics fear will leave millions struggling to pay off their increasing debts.

Borrowing £50,000 through a typical 25 year mortgage would cost around £236 a month, while borrowing the same amount through First Direct at the rate of 6.7% would result in monthly repayments of £743.45 – a total amount repayable of £62,449.68. Experts are expecting that people who do not own a house or do not want a mortgage would be more attracted to this type of personal loan.

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