The Art of Budgeting and the Role of Short-term Lending

Sun, Feb 9, 2014

Financial Advice

Since the beginning of the final financial quarter of 2013, economies throughout the Western world have experienced continuous growth. This trend has been particularly prominent in the U.S. and UK, and it shows no sign of abating in the immediate future.

According to recent statistics from the UK, it appears as though this growth has been predominantly inspired by increased consumer spending. While this may account for the vast majority of economic activity in the Western world, however, the subsequent rise in borrowing is causing concern among leading economists.

Successful Financial Management: Does Short-term Lending Play a Role?

Any economic recovery that is based on heavy consumer borrowing is bound to cause trepidation, especially given the circumstances surrounding the onset of the Great Recession in 2008. It is important to remember that borrowing plays a pivotal role in a number of everyday financial transactions, and the onus is on lenders and consumers to ensure that they act in a responsible manner. From car financing agreements to mortgages, responsible borrowing is at the core of every vibrant economy.

The issue is further complicated by short-term lending, however, which makes credit more accessible to individuals with poor credit but is available at inflated rates of interest. While this helps to drive the economy on one hand, it also creates potential issues with regards to long-term debt and insolvency. With this in mind, consumers should keep the following points in mind when incorporating short-term loans into their existing budget plans: –

  1. The Purpose of Unsecured, Short-term Lending

While it is often vilified in 2014, unsecured short-term lending does serve a clear purpose in the modern world. More specifically, it can be used to cover emergency or unexpected costs that do not feature as part of your budget, as this enables you to set aside a portion of your next pay check to repay the loan in full. Conversely, short-term or payday loans should never be used to cover the loss of a regular income or a pre-existing budget deficit, as this will trigger cyclical debt that continues to rise in line with considerable interest rates. If you deviate from this rule, your budget will soon be overwhelmed and ultimately rendered irrelevant.

  1. Understand the Difference between Secured and Unsecured Short-term Lending

While short-term lending is often considered to be unsecured, today’s consumers can also access secured agreements that require their homes or cars to be used as collateral. Companies such as 1st Stop Home Loans provide a relevant case in point, as they bridge the gap between established secured lenders and modern day firms that broker deals for customers’ with poor credit backgrounds. It is therefore crucial that you understand the fundamental differences between secured and unsecured loans, and clarify the terms of your agreement before you make a commitment. This will not only help you to adhere to your budget, but also protect your most valuable financial assets.

  1. Calculate the Full Cost of Lending and Interest Rates

Whenever you are managing a personal finance budget, it is important to deal in exact costs and figures. This is especially true when taking out a short-term loan, as the sum that you borrow must be factored in alongside all affiliated costs. By analysing the length of your agreement and the interest rate that is associated with the loan, it is possible to calculate the total cost of credit and the impact that future repayments will make over time. Following this process is imperative if you are to adhere to the terms of your agreement, and make regular repayments in full without spending outside of your financial means.

Lewis is a personal finance and commercial blogger who is based in the UK. He has a keen understanding of finance and the role of budgeting in creating long-term economic stability.

 

 

 

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