Do you want to get a loan? I guess everyone has been at this stage in their life, so it is crucial to pick the right loan.
You do not want to choose a loan, which is extremely hard to manage and has exceptionally high risk. All in all, you must know what types of loans are available and what you are getting yourself into.
Why Do You Need To Borrow Money?
This is an important question that helps you to determine the type of loan you want.
Do you want to buy a new car? Do you want to live out your ultimate dream? Maybe a lovely house, or do you want to get rid of your debt once and for all.
It could be that you might have an important event coming up and you are short of money.
Types Of Loans
Before we get into the many types of loans, we should discuss most loans’ two main categories.
Secured Loan
This is when you borrow money but provide a particular asset as collateral like a house or a car. The lender usually holds on to the asset provided as collateral until you pay off the loan.
In any case, you cannot pay off the loan; the lender has the right to take control of the said collateral. It is often easier to get a Secure Loan because there is less risk involved for a lender.
Unsecured Loan
An unsecured loan is the opposite of a Secured Loan as no collateral or security must be provided. It is quite challenging to receive this loan as it is precarious for a lender; hence your income and ability to pay back is looked at.
Since these loans are risky, loan limits are relatively low, and interest rates are high. An example of this is a credit card where you take out a personal loan to buy stuff. If your said amount is paid immediately, no interest is charged.
Car Loan / Car Finance
You might be wondering if getting a new car, but unfortunately, you do not have the finances. Lucky for you, there are many ways to get a car loan, either through a car dealership or you could shop around banks for better deals.
With a car loan, you can own a vehicle straight away and pay back the lender in intervals. You usually pay back the lender during a time frame of 1 – 7 years, depending on the agreement.
Because this loan is classified as an unsecured loan, the lender has no claim on the car or any of your assets. At the same time, no deposits are needed to secure the car.
Car financing is an entirely different type of loan and pertains to a Secured Loan. This means the lender is the owner of the car until and unless your agreement ends. Lenders usually run a credit check to confirm you have the capability to repay them the loan.
Business Loan
Business Loans are provided through many banks but mainly by the Small Business Administration (SBA). These loans are mainly for small businesses who are intending to grow in size and revenue.
Such loans are known as a secured loan as the business owner must provide his assets as collateral until the loan is paid. These loans usually last for 5 – 25 years with a non-negotiable interest rate.
Although getting a small business loan approved is arduous as it requires creating a business plan, most applications are rejected. If you are planning on applying, It would be best to be extremely thorough with your application.
Home Loan
A home loan is generally a loan helping you to purchase a house or, in other words, a mortgage. A mortgage is a loan where your house acts as collateral for your loan.
The bank usually lends you money, which must be paid over a certain period of time with interest. If you cannot pay back the loan by any chance, the lender (the bank, in this example) can take away your house.
This is known as foreclosure. Typically, mortgages are around 30 years long, with interest rates varying between 3 – 5 percent.
Student Loan
A student loan is a loan offered for education-related expenses, including college tuition fees, living costs (college only), and textbooks.
There are two types of student loans, one being a federal loan the other private loan. These loans are generally paid directly to your university, and in any case, there is an excess that amount is given to you in the form of a check or deposit.
Student Loans are generally unsecured loans as no collateral is a requirement for the application of one.
Federal loans are considered the easiest to get as they are based on your “Expected Family Contribution.” This means that your family’s income will be used to determine how much loan you will be provided with. T
he federal loan is the most widely used as it offers low-interest rates and flexible repayment policies.
Personal Loan
A personal loan is more of a general-purpose loan that can be used for almost anything. Usually, people prefer getting this type of loan because the purchase that they need to make does not cover the credit card limit.
These expenses can be from a significant event to unexpected expenses like a wedding, funeral, or a medical emergency.
This loan is unsecured, which means that no collateral is required to receive the loan. If so, however, you are unable to pay by any means, lenders can take action in the form of filing a lawsuit against you.
Although personal loan interest rates are pretty low, it would be best to reconsider whether a personal loan is necessary. Many people unnecessarily fall into debt by taking a loan for something they do not need. After all, any loan is a form of debt.
Debt Consolidation Loan
Do you find making monthly credit card overwhelming? Debt consolidation loans come in as they help you pay out your debt through a loan with interest every month.
This method helps avoid ruining your credit history and, in a way, pays off your debt. There are a lot of sites available for debt consolidation loans like Payoff, Supermoney, and Prosper.
It is straightforward to find a personal loan that suits your needs. These loans usually last around for 1-5 years.
Things To Keep In Mind When Taking A Loan
Most of the loans I mentioned above are very distinct, but some have certain conditions that some debtors often avoid. I hope I can void that dilemma.
Do You Really Need A Loan?
Getting a loan is undoubtedly a huge decision, but you need to ask yourself, are there alternatives to borrowing money? Is borrowing money going to hurt you financially or by other means.
According to Finder, around 31.78% of people take out personal loans to consolidate debt, and around 47% took it out for emergencies and bills.
However, it would be best to save money for emergencies rather than taking out a loan. Again, it is understandable not to be able to save money as it is hard. I strongly recommend checking out Budgeting 101.
How Much Can You Afford To Payback Later?
This is by far the most important question of how much you can realistically afford to pay back. Whenever you are getting a loan, there are a couple of things that you need to take into consideration.
TAR (total amount repayable) is the amount you have borrowed in addition to interest. Always consider all your options as sometimes some options are much cheaper or better than the other.
Credit Score
The next thing to keep in mind is what type of loan and rate you should qualify for. Credit rates are the backbone of good rates, payments, and overall savings. I recommend using tools like Credit Karma, which promises a free credit score report.
Hidden Fees
I will admit I rarely read the terms and conditions pages; I skim through the pages. However, this is definitely not something you should ever do, especially when signing a new loan.
Loan processing: This is a type of fee, which is 1% of the loan value. This is basically when the lender charges you for the application process. In some cases, this can be avoided, and you can ask for them to be waived.
Prepayment penalty: This may sound ridiculous, but if you pay off your loan earlier than agreed, you must pay the penalty. This is because if, per se, you pay off a loan for 10 months, lenders are missing out on 10 months’ worth of interest.
Late payment fee – I repeat, do not make late payments because you will not only be given a penalty; in fact, your credit score might have a bad effect. Sometimes lenders do give a one-time waiver but do not take it for granted to pay up earlier.
Conclusion
No doubt, there are many factors to keep in mind when it comes to getting a loan, but you should always take into consideration the alternatives for getting loans.
Most of you are your own financial planner, so I recommend checking which type of loan is right for you and which you can payback. After all, a loan is a debt, and you should always be careful because no one wants to end up being bankrupt.
