If you need money in a hurry due to unforeseen financial circumstances, then you may wish to apply for a loan.
There are so many different types of loans available that you might not know which type would suit your needs best. The two main types of loans are secured and unsecured loans.
Knowing the difference between them will help you determine which one would be best for you.
The real benefits of secured loans
When you apply for a secured loan you will need to have an asset to secure the loan. In the event that you don’t make payments on the loan, you could risk losing that asset. Interest rates on secured loans are usually lower than those on unsecured options. A secured loan is a lot less risky for the lender so they reward you with more favourable loan terms.
Secured loans include home equity loans, second mortgages and debt consolidation loans. It’s much easier to obtain a secured loan than an unsecured one. The main advantages of secured loans is the lower interest rate, the easier repayment terms and the speed at which the loan can be granted.
This is also the most dangerous type of loan as you risk losing your home or asset in the event of non-payment. This will negatively affect your credit score and leave you in a worse financial position than you were before.
What about unsecured loans?
An unsecured loan, on the other hand, is a much less risky option. With this type of loan, you borrow money from a bank or lender but you don’t need to place one of your assets up to secure your loan. If you fail to make payments on your loan, you may be charged penalty fees or a higher interest rate. This will also have a negative impact on your credit score.
A very popular loan option is the payday loan. This loan type gets its clever name because it needs to be repaid by your next pay date. Usually within 30 days. You won’t be subjected to interest charges but you will be charged a once-off fee. If you can’t repay the loan then you will be charged extra and that could make your loan cost a lot more than you originally bargained for.
Drowning in debt?
If you find that you have more month left than money and you are struggling to make ends meet while the bills keep piling up in the corner then it could be time to consider a debt consolidation loan. Creditors can become difficult to avoid so if you are nervous to answer your phone in case it is a debt collector the time has come to speak to a professional about your debt. The more you know about what you owe, the better personalised and suitable of a financial recovery plan you will be able to develop.
A debt consolidation loan involves combining all your existing debt and paying them off in full. You will then be granted a loan for that amount. The lender will come up with an easy payment plan that you can manage so that you can pay back the loan in monthly instalments. This loan will save you money in the long run as you won’t be charged interest on multiple accounts or risk having to pay late fees. The longer your loan term, the more you will end up paying for your loan.
Loans for people with bad credit
If you have a low credit score and you find it difficult to obtain a loan from your bank because you have bad credit but you can apply for a bad credit loan.
Like its name suggests this type of loan was specifically developed to help those with bad credit in their time of need. As you are seen as a risk to lend money to because of your poor credit you will be charged a higher interest rate. This is to protect the lender in the event that you stop making payments on your loan. There are both secured and unsecured bad credit loans.
Guarantor loans for those with no credit history
If you are underage or don’t have a credit score yet then you can apply for a guarantor loan. To apply for this type of loan you need to ask someone that you know that has a good credit score to apply with you. They would then co-sign on the loan and act as your surety. In the event that you don’t make payments on your loan they will then become responsible to take over these repayments. This makes the person that signed as your guarantor responsible for repaying the loan. This type of loan is more expensive than a traditional personal loan.
Know what you need before you apply
Before you sign on the dotted line, it is important to understand what you are getting into. The advertised interest rate on a loan might seem great but these rates are usually reserved for those with a very good credit score. You need to make sure that you know how much your interest rate will be.
Also, make sure that the interest rate will remain the same for the duration of the loan. It might seem tempting to opt for a longer loan term but don’t do this if you can afford to repay it off faster. This will give you more time to repay the loan, but the longer the loan term, the more you will end up paying overall.
Once you know what you need from your loan it is much easier to make a decision on which one is right for you.