People generally have different goals and things they wish to accomplish in life. However, most people on the planet seem to have one goal in common which is owning a home. There are several advantages to owning your home, including the fact that its value appreciates every year. This means that it can be viewed as an investment.
Let’s face it, while owning a home is something great to wish for, only a few people will accomplish this without a loan. Homes are expensive these days and the average person can’t afford to purchase one with what they earn. As a matter of fact, 8/10 people in the U.S. bought their homes through a mortgage. However, it is not that everyone who buys a home with a mortgage isn’t capable of purchasing it outright with their money. Mortgages simply give you the freedom to do other things or make investments with your money.
Visit https://worldpopulationreview.com/ to learn more about the median home price by state in the U.S.
Loans help us do so many other things not only purchase a nice family house. These advances can be used to finance other consumer expenses, including vacations, car purchases, college tuition, a business, or even general, everyday living expenses. Regardless of what you need that quick cash for, there’s a loan that can cater to that need.
What are Consumer Loans?
In its simplest form, a consumer loan is any credit that is taken out to finance consumer expenses like starting a small business, paying for college, buying a new car, or going on an exotic vacation. Depending on the type you’re going for, you may or may not provide a collateral. Loans that do not require a collateral are unsecured while those that do are secured loans. Let’s quickly go over each of them.
Secured Loans
These are secured advances that are given out to customers. By secured, we mean that the customer borrows against an asset which is generally referred to as collateral. Typically, when a borrower approaches a lender for a loan, along with other requirements, the borrower must tender a collateral. This collateral, if liquidated, must have at least, the same monetary value as the amount being borrowed.
Collaterals helps lenders minimize their risks. If a borrower, for any reason, is unable to repay their debt, the lender simply liquidates the asset provided as collateral at the time of application. The asset could be anything from shares in a company to vehicles, or even real estate. Common examples of secured loans include mortgage, home equity, business, and car loans.
Advantages
1. They can be used to finance any expense, as long as it is legal. Common uses include home improvement, debt consolidation, and do on.
2. They typically come with lower interest rates since they are secured with collateral. This reduces the overall cost of borrowing.
3. Lenders tend to give out larger amounts of money than they normally would on a credit that’s unsecured. Again, this is because the credit is secured; hence, it is less of a risk. Also, if you’re putting your home down as collateral, the more equity you have in the property, the larger the credit you may qualify for. To know how much equity you have in your property, simply deduct what’s left to be paid on your mortgage from the total value of the property.
4. You can get a secured loan without a high credit score, provided that you have a good credit history. We should also mention that good credit ratings or history often attract lower interest rates. That said, being able to get this advance is mostly possible because it is secured against an asset. If you default on repayment, the lender could sell off the asset and recover the owed funds.
5. Borrowers can spread the payments over a longer period which would make monthly payments less of a challenge.
6. Monthly repayments can be used to build up credit score.
Disadvantages
1. You may end up paying more on interest over time if you spread your repayment over a long period. This is why you must be clear about what you want before taking out a loan. If you want to repay the debt comfortably, then spread it out, if not, choose a shorter term.
2. Borrowers can access larger amounts. As a result, some borrow more than they actually need and sometimes have difficulty paying back.
3. Some lenders may charge you if you decide to repay the debt earlier than originally stipulated in the contract. These lenders typically make it known to clients when they take out the advance.
4. You may lose your property or whatever asset you provide as collateral if you don’t maintain repayments. Therefore, before accepting an offer, ensure that you can comfortably meet the monthly payments for the full duration of the term.
Unsecured Loans
Unlike secured loans, these loans are given out to consumers without the need of a collateral. Obviously, the risks are higher for lenders. This is why only applicants with an impeccable financial history, high credit score, and sometimes, above average income, get their applications granted.
With no collateral to fall back on if a borrower defaults, it is up to lenders to be meticulous in choosing which applications to grant. Also, because of the type of risks that lenders are exposed to, interest rates on these loans are typically higher than secured loans. Borrowing limits are also lower. Credit cards, personal lines of credit, personal and student loans are common examples of unsecured loans.
Advantages
1. With no collateral involved, unsecured credits are less of a risk to borrowers.
2. Can come in handy if you don’t own a property or any other eligible asset that can be presented as collateral.
3. Though qualification requirements are difficult to pass, the application process is much faster than a secured advance. This is where you hear terms like Søk forbrukslån på dagen which is Norwegian for “apply for a consumer loan on the day”.
Disadvantages
1. With lenders facing more risks, interest rates are usually higher than unsecured loans.
2. Only people with a high credit score, consistent high income, and good credit history can qualify.
3. These loans lack flexibility, that is, the term and interest rate agreed upon at the time of application stays the same. So, if you agree to pay $200 every month for 3 years, you cannot adjust to a lower payment. Also, paying off the debt earlier than agreed upon will attract an early repayment fine.
4. Because of the risk involved, credit limits are much lower.
Applying for Consumer Loans: What You Should Know
So, you’ve decided to take out a loan to maybe start a business or buy a new car. What are the steps involved and what should you know before filling out an application? Loans can be useful in getting out of a tight situation. But sufficient research should go into what lenders to approach, and the type of advance to take out.
Shopping around for the best rates is a must. No matter how great the first deal is, never take it until you’ve approached a few other lenders. Usually, better deals exist outside of that one that appears golden. As we mentioned above, you shouldn’t take money from any lender that’s willing to grant your request. Some have hidden charges that could go up to a few hundred or even thousands of dollars. You’re better off working with reputable loan providers with more transparent processes.
Final Thoughts
Finally, don’t apply for loans from different lenders within a short period. If these applications get rejected, they can stay on your financial record for up to six years. What’s even more dangerous about this is that these records would be made available to every lender you approach in the future. The more rejected applications you have on your record, the fewer the lenders that would be willing to take a chance on you.
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