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Understanding Loan Duration

When looking to take out a loan or other form of credit, the borrower can often become overwhelmed by the sheer amount of options available. This isn’t just the number of lenders (from major banks to small online lenders), but also the variety of features (such as secured and unsecured, payday loans, mortgages, microloans, credit cards, and an endless list of other options). Before choosing a loan you also need to consider what is known as the loan term or duration, which is how long the loan will be outstanding before you have paid it all back. In general this falls under short, medium and long. Which you choose will depend on your personal situation. Each option will have an impact on the amount you can borrow and the interest rate, so you must take the time to consider it fully.

Short Term Loans

Short term loans are loans that are outstanding from between a couple of weeks to a couple of months. Common types of short term loans include

Payday Loans: A small loan with one repayment on or just after your next pay day (two weeks on average).

Pawn-Brokering: This is when you give a broker an item of value and get a percentage of its worth as a loan). As long as you repay the loan within the time-frame given, you will get the item back. If not they will sell it to cover the debt.

Informal loans from friends and family.

Due to the nature of a short term loan the amount you can borrow is usually small (typically from a few hundred to £1,000) – especially if you’re talking about no credit check loans. Anything more and you are unlikely to be able to pay it back in the timeframe given. Because of the small duration interest rates are also one of the highest in the industry, as the lender needs to make it worthwhile for their profit-margins.

Asset-Backed Loans: Short-term loans are often available at better amounts and interest rates if you off collateral. The concept is very similar to that of pawn-brokering, however these loans are usually offered by traditional lenders.

Short term loans are ideal for those that are temporarily in need of a small influx of cash, maybe to cover an unforeseen bill or expense, or to purchase a product upfront. As long as you can cover the debt with your next paycheque or couple of paycheques, you should be ok. While comparatively you will be paying more in interest, this won’t have a real world impact unless you end up taking out lots of small term loans in a row. If this is likely to happen you should consider taking out a medium term loan.

Medium Term Loans

Medium term loans are loans that have durations of between 1 and 7 years, and are typically issued from mainstream banks and lenders. They will commonly fall under the term “personal loans” but can have several different options – including secured and unsecured (collateral or no collateral). The loan is repaid with interest in instalments (usually of equal amounts on a monthly basis).

On average in the UK medium term unsecured loans come in values between £1000 and £25,000. The amount you are offered depends on how much you request but more importantly, your income status and credit history. You are more likely to be approved for larger amount if the duration is longer, because this makes the monthly repayments smaller and you will be less likely to struggle. The longer the duration the smaller the interest rate. Likewise, shorter durations command bigger interest rates. It is important to understand that even with a longer duration and shorter interest rate, you will still typically pay more in the end.

Long Term Loans

Long terms loans of over 7 years are almost exclusively reserved for mortgages, which are loans to buy homes and properties. These come in amounts in the tens of thousands to hundreds of thousands, and can be repaid over many years. Commonly this is 25 years but some lenders have been known to offer mortgages for as long as 50 years.

Mortgages are one of the most stringent types of loan in terms of credit and background checks. The money legally has to be used to fund the purchase of a property; you must provide lots of proof of income, and they may ask you all sorts of questions. These can include whether you have children or plan to in the future, what you typically spend your money on each month, whether you have student loans and other debt, and more.

Over time as you have paid off a portion of your mortgage, you will gain what is known as equity. This is basically the amount of the property that you own. You can “remortgage” or take out a home equity loan on this percentage.

Microloans and Microlending

There are many different loan products on the market and new technology is increasing the variety.

For example peer-to-peer (P2P) technology (the ability of large numbers of people to connect and share data without centralisation) is changing the business world – particularly finance. One area where this is seen is with the emergence of microlending. A microloan or microcredit is a small loan funded by an individual or divided among a group of individuals (commonly through a P2P platform), instead of a bank or lender that operate in a traditional business model.

Microloans are becoming a common philanthropic method of helping people in the third world, who do not typically have access to credit to launch businesses; however there are several microlending platforms serving regular borrowers in the UK, US and other western nations. Just like traditional loans, microloans are issued with interest on top of the principal. Because interest can be quite high (especially when lending to those with poor credit or from poor economies) some people see the concept as high risk, but with high reward.

What makes microlending particularly unique is that it’s up to the individual or community how much they are willing to lend, who they will lend to, and the interest rates charged. People who want to use their savings to make a profit can take part in microlending and adopt as much risk as they feel comfortable with. Using P2P platforms they can easily connect with borrowers who are willing to accept their terms.

Depending on the platform an internal credit score is calculated based on factors such as whether the borrower is a home owner, how much they earn, traditional credit information, and if they have ever successfully or unsuccessfully borrowed a microloan in the past.

Microloans do not require any collateral to secure them, so there may be increased risk for the lender. In turn they can charge slightly higher interest rates, which make it a better investment than the top savings accounts.

However because of P2P technology risk can also be reduced and is usually spread among many lenders. This is accomplished by lenders only investing a small percentage per loan. Those who want to invest a lot build up a portfolio that may contain contributions to hundreds of different microloans. So even if a few loans default, there will still be an overall profit from the portfolio. On the flipside borrowers are therefore indebted to many different individuals (not just one company).

Most microlenders are individuals – some are tech and P2P enthusiasts, others are simply looking for new ways to make their savings go further, and some are professional investors. Most major banks and highstreet lends are not interesting in microlending, so it has truly become a pure decentralised peer-to-peer process.

As mentioned, microloans are commonly issued for two reasons. One is to fund entrepreneurs in third world or developing nations, who want to start a small business but cannot get financing from lenders or the government in their own country. Lenders often take part in this kind of microlending not just to make money, but as a charitable endeavour as well. Similar to a Go Fund Me campaign, borrowers will tell their story, describe the ins and outs of the business they are trying to launch, and the benefits to investors.

Microloans are also issued to people in developed nations who are struggling to obtain credit from traditional sources because they have a bad credit rating, or those who simply want to borrow outside of the established financial system. Similar to payday loans, the amounts are small and ideal for those faced with unforeseen expenses or have gone over their monthly budget and need some cash to tide them over.

Interestingly unlike traditional lending, microlenders often require the borrower to explain what they want to use the money for. Individual lenders on the platform can then decide whether they deem it risky or not. Sometimes requested loans can only be partially funded because not enough lenders were interested.

Despite still being quite obscure, microlending is already a multi-billion pound industry. Platforms make a profit by adding in their own fee on the lender’s side, borrower’s side or both.

The Lowdown

Microlending is an innovative new opportunity for both lenders and borrowers, born out of the growing peer-to-peer web-based economy. Individuals looking to make money can get high returns, funding borrowers who struggle with traditional financing due to issues in their country or a bad credit history.

Some lenders may pledge to fund a whole loan if it meets their own requirements, but more often than not it is safe and more desired to spread investment over portfolio of microloans – a diversification of risk.

UK Student Loan Guide

Unlike the United States and other countries that issue private student loans, all student loans in the UK go through the Student Loans Company (a non-profit owned by the Department of Education). This is true regardless of the University or course you choose, though there are individual subsidiaries depending on if you are applying from England, Northern Ireland, Scotland, or Wales. The organisation also handles the loans to students coming from the European Union.

For fulltime students there are two types of loan available, one that covers your course (issued for each year of your course rather than one lump sum), and one that helps you cover living expenses if you meet certain terms.

You are only required to repay student loans when you earn over a certain amount, and the amount you pay each month in instalments is determined by how much your earn over the threshold. This is much different from a regular loan that is based on how much you borrow.

Interest is also charged on student loans but does not interfere with the minimum earnings threshold or the amount you must pay in instalments.

How Much You Can Borrow

New fulltime students for the academic year of 2017 to 2018 can borrow up to £9,250 to fund their course. This is called a Tuition Fee loan.

The amount you can borrow as a Maintenance Loan (for living costs) depends on your living situation. If you are living at home with parent(s) you can borrow up to £7,097. If you choose to live away from home in a shared house, flat or student accommodation you can borrow up to £8,430. Due to rent prices this jumps to £11,002 if you are in London. If you are studying for a year abroad as part of a UK course, you can borrow up to £9,654.

The Maintenance Loan is intended to help you cover rent, food and bills, supplies for Uni (books etc), and other day to day costs that you would usually fund with a job. Nobody however will check what you spend it on, so in theory you can also waste it on partying. Many students will take out a part time job to ensure they have enough money to fund living and leisure while at university.

Repayment

You do not have to pay back any part of either type of student loan until you earn over £21,000 in the financial year from employment or self-employment. The more you earn, the more you are required to contribute. After 30 years the entire debt is wiped, regardless of how much you still owe. In action many people will never have to pay back their student loans in full, so scare stories of crippling student debt are not being entirely honest. It’ more practical view repayment of student loans as an income tax rather than a debt.

Let’s do some math. If on average you earn £41,000 after graduating university, over the 30 years you will have repaid £54,000 for tuition fees. Around £38,900 will be completely wiped.

At the moment the percentage you pay on earnings over £21,000 is 9 percent. So if you just broke the threshold and earned £22,000, you would only be required to pay 9% of £1,000 each month – a measly £90.

When we look at it objectively the UK education system is one of the most accessible and affordable top flight systems in the world, because there are no costs to pay upfront and you only begin to repay when you are earning a reasonable amount. Graduates on average earn more than those that didn’t go to university, so they can afford a certain contribution and help support the next generation of students.

Top Facts

1) Student loans do not go on your credit report and therefore do not impact your ability to obtain commercial credit. The only exception is that mortgage lenders are allowed to ask if you have an outstanding student loan.

2) No matter what your situation you will never have to pay upfront. Even if you have the money to do so, or if you want to repay early (which you can), you may be better off financially not doing so.

3) Elderly students can learn for the sake of learning and generally will not have to worry about repayment. If you’re 60 and there was a subject you really wanted to sink your teeth in to, doing it now is worthwhile.

4) Even if for whatever reason you run away from repaying your student loan, the law states that debt collectors cannot come after you. However if you are in employment repayments may be taken directly from your salary.

5) Part-time students and post-graduates are also eligible for loans of lesser amounts.