Short term loans have many different uses, but should you use a short-term loan to buy a house? Here at Moolr, we don’t believe this would be in your best interests. Find out why below.
For many people in the UK, their dream is to one day be a proud owner of a house. It is no secret that renting while providing suitable long-term accommodation for individuals and families, isn’t a sound investment strategy. It makes more sense to save up for a deposit on the house and eventually owning it after some years of payments.
These days, there are many ways that folks can get on the property ladder. This is regardless of their financial circumstances. There was once a time where it was standard practice to only approve home loans to individuals with a healthy credit history, especially after the global financial crisis of the last decade.
But, lenders may even approve those with a less than average credit score, especially for long term commitments like mortgages. In Britain, the short-term loan industry is growing at an exponential rate. And, despite some people’s reservations of the lending habits of certain providers, most borrowers pay their loans back in full before the due dates. Because lenders have a responsibility to risk-assess their clients, there is less of chance of borrowers knowingly defaulting on their payments.
When it comes to borrowing money to buy a house, the standard practice is to apply for a mortgage, usually from a high street lender such as a bank or building society. Of course, each lender has their own specific lending criteria. Some prospective home buyers might find it tough for those financial institutions to approve them.
In the UK, it is possible to take out what is known as a bridging loan. In a nutshell, this is a type of loan product that you can use to fund the purchase of a property such as a house or flat. It is a kind of short-term loan, rather than one that spans many years or decades. Repayments over many years is typical with conventional mortgages.
A bridging loan is really for people that are waiting to sell their current properties, for example. In this case, they will use the proceeds to pay off their new home once they do sell. While bridging loans will help to close the gap between selling an existing home and buying a new one, the only downside is that they usually have incredibly high-interest rates. It isn’t uncommon for bridging loans to charge around 18% APR or more.
For some people, other short-term loan products could also be useful as a means to purchasing a property. Because the deposit requirements for tonnes of conventional mortgages can be at least 5-10% of the property’s value, it can, therefore, be difficult to raise the capital in a short space of time.
One method to raise the money needed for a deposit is through taking out one or more short term loans. Usually, this will only work if the applicant is 100% sure they can pay off the loans in a specified period, such as six months or a year. It can be a solution that works well for those that are expecting a lump sum of cash, such as an inheritance, but want to buy themselves a property first.
As with bridging loans, the interest rates on short term loans can be higher than ones from conventional sources. With that in mind, it does make better sense to keep borrowing costs down as much as possible when purchasing a new home by looking for cheaper alternatives.
The problem that some borrowers in the UK face are that they can soon become inundated with debt if they take out several short-term loans. Whilst lenders have to practise responsible lending, the onus is on the borrower to calculate whether they can afford to keep up with the incoming future financial commitments.
If a borrower does not pay back their loan as agreed, the borrower will default on their loans and end up incurring charges. Soon, late payment fees and even debt collection costs could be added. As you can imagine, this could very well make the total amount of money owed spiral out of control.
The above points aside, the amount of interest payable on the loans will negate the benefits of borrowing the money in the first place. When it comes to taking a short term loan to buy a house or flat, the interest payable could exceed the amount borrowed in the first place.
As you may or may not have yet gathered by now, we do not believe that short-term loans are not the ideal solution for buying a property. Whether it is a bridging loan or a product from a cash loan advance lender, it is not recommended. When it comes to big expenses, it makes more sense to consider other sources when it comes to lending money.
The big issue with taking out a bad credit short term loan to buy a house is that it will financially cripple borrowers if something goes wrong. For instance, if they don’t get the money they expect to pay back the lenders, or they get made redundant from their jobs.
So, that was Moolr’s blog on what we think of using short-term loans in order to buy a house, we hope this was an informative read.