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Building Your Credit: How Small Loans Can Benefit Your Finances

Needing some extra money for an unexpected expense or to make a major purchase? Taking out a small personal loan of around £1,000 can provide the cash injection you need. But is it really worth taking on debt and paying interest? There are pros and cons to weigh up when considering such a loan.

The Benefits

Access to Cash Fast:
If your car has broken down and you need funds quickly to pay the repair bill, applying for a £1,000 loan could get you the money within days. This is much faster than saving up over months to cover an urgent payment. The ease and speed of obtaining funds is a major plus point of small loans.

Building Credit History:
If you’ve never had a loan before, borrowing a manageable amount like £1,000 can help demonstrate to future lenders that you can handle debt responsibly. Making all your repayments on time builds your credit score, enabling easier approval for loans, credit cards and mortgages later on at better interest rates.

Lower Interest Than Payday Loans:
While a £1000 loan will charge more interest than a larger personal loan or secured borrowing, it will likely have a much lower APR than ultra short-term products like payday and guarantor loans. This makes small loans a middle ground option when you need money faster than a bank will approve you for.

Fixed Repayments:
Taking out an instalment loan rather than using credit cards means you have a fixed monthly repayment to budget for. This consistency can make financial planning easier compared to varying credit card minimum payments, especially if your card interest rate fluctuates.

Could Consolidate Debts:
If you have existing expensive debts such as payday loans or credit cards, a £1,000 consolidation loan with a lower rate will reduce the total interest paid. Just make sure to pay off and close the old accounts so you aren’t tempted to use them again and end up with twice the debt!

Potential Drawbacks

While small personal loans offer useful advantages, acquiring more debt does come with some risks:

You May Struggle With Repayments:
If your income then drops or unexpected costs come up, making your loan repayments alongside other expenses could become very tough. This could impact your ability to pay for basics like rent and food, as well as damaging your credit score if repayments are missed.

Interest Quickly Adds Up:
While the monthly repayments on a £1,000 loan may start out looking affordable, the interest charges mean you end up repaying much more over the full loan term. Depending on factors like your credit score and chosen duration, you may pay back over £300 extra for a 12-month loan period.

It’s Not Free Money:
Some first-time borrowers wrongly see loans as “free cash” that they won’t have to fully pay back. But unless you win the lottery or get an inheritance windfall, loans must always be repaid – usually for a good deal more than was borrowed due to interest fees. This trips up the unwary.

Can Lead to a Debt Spiral:
Once you’ve successfully had one loan, the ease of borrowing may tempt you to take out more and more. This could gradually lead to a debt level that is completely unaffordable. Borrowing can be addictive so make sure it doesn’t snowball out of control.

Weighing It All Up

Overall there are reasonable arguments on both sides of whether borrowing £1,000 is a wise financial move or unnecessary risk. Each person’s situation is unique.

If the funds let you seize a one-off opportunity like investment in a business or education that will boost income long-term, the loan could transform your finances. But if you simply want the £1,000 to go on a vacation or new TV, it makes little sense to take on expensive debt for rapidly depreciating assets.

Assess your position honestly. If missing a few loan repayments would risk major hardship, play it safe. But if you have stable income and are sure you can meet the repayment schedule, £1,000 borrowed strategically could provide just the leg-up your finances need.