One of the more common terms that many people looking for funding generally encounter is a consumer loan. Need money to finance a wedding, car, vacation, dinner, phone, or air conditioner? No problem!
With these types of consumer debts, you’ll get the money you need, whether it’s for emergencies or buying something fancy from the department store. You’ll find them to be unsecured, which essentially means that you don’t have to present collateral to get them.
Various lenders will determine the sum you can borrow through your credit score, history of repayments, current income, the ratio of your debts to your earnings, and a lot of other factors. Fortunately, if you’re prepared to undergo these strict checks, you can get qualified for a lump sum amount that you can use for student loans or mortgages. Below are some things to know about them.
Unsecured or Secured: Which One is Right For You?
Depending on your needs, getting a secured loan which is backed by assets, will mean that you’ll get more favorable annual percentage rates. This translates to lower monthly payments and a cheaper loan overall.
However, when you stop making payments, the financier has the right to seize your car, home, or other assets that you’ve put on the line. On the bright side, if this is something that you can afford and the lending institutions determine you to be a low-risk borrower you will be able to have a longer repayment period and get larger sums of money.
With unsecured or signature loans, only your name and your credit score are on the line. There will be no risk of losing your valuable residential properties, and some lenders don’t recover the principal amount that they’ve granted to some borrowers.
On the downside, you will have a limited amount that you can borrow with a very high-interest rate. This is not usually the case, though, as you can always get a more reasonable rente when you know where to search. However, since the bank or the credit union is facing more risks, limited amounts are only available for new customers.
Categories and Options
You might think that your choices end on those two types, but you should also determine whether you need the close or open-end loan.
1. Revolving Credit
One of the best examples of a debt that does not have an end date is a revolving credit card. Minimum amount dues are required to be paid in full each month plus the interest rate, and they are often unsecured. When clients miss the payments, additional charges may apply.
After the payment has been made, individuals can then start to make purchases on various items that they want, and they will only get the bill at the end of the cycle. This is going to continue, and the accrued interest will still appear on the bill until the entire balance is paid off.
2. Closed-Ended Loans
Receiving a lump sum amount and paying it in installments is possible. Use the money to fund various purchases and make equal payments over time. They are secured and can be in the form of a car payment or mortgage. If there are defaults, the financiers can seize the assets in the future.
Are you Eligible?
While it may be true that there are several offers in the market, you might start to wonder if you’re eligible in the first place. After all, you can lose your confidence if you’re always rejected when applying to banks, credit unions, and other private financing institutions out there.
Fortunately, with the help of a few clicks and a stable internet connection, you can get pre-qualified and determine if you’re eligible online. All you need to do is enter information such as your current credit rating, other loans you have, income, bank IDs, and tax returns. You will then receive a notification from the loan issuer if you’re qualified or not and this can take only a few minutes.
Factors that Will Decide Your Interest Rate
Consumer debts will still need repayment over time, and the financiers will charge the interest rates because this is how they continue to do business and stay afloat. Some of the things that you need to do to get the most favorable deals and options out there are the following:
1. Take a Good Look at your Current Score
Consumers’ creditworthiness will be determined by their credit reports and these are often used in various financing sectors. To start with, you need to obtain a copy of your score so you will have a reference for what others are going to see when they do a background check on you. When you do an inquiry on your rating, this is not going to cause the points to go down, so you can always do this as often as you want.
Taking a look at the comprehensive report will enable you to determine the kind of loan you’re eligible for. Only state the amount that you can see on the website because some systems will automatically reject your paperwork if you exceed the maximum loan, but the requirements were not met. Knowing where you stand in a financial sense can be tricky, but it will be worth it.
People who don’t have a lot of loans, are always on-time with their payments and have low credit utilization are often the ones who are getting the top-tier deals. When you have a poor score, it can be very challenging to find a reasonable rate, so improve it before applying.
2. Terms to Keep in Mind
Paying back the loan will mean that you have to pay back the interest on top of the principal owed. Depending on the agreement and the terms of your choice, a percentage of the payments will largely go to the interest and other fees in the first few months.
Simple Interest: This applies to most consumer debts, where it will apply the prevailing simple interest rate to the principal amount. With an online calculator, you’ll know what your monthly payments will be for $10,000 with a 10% APR payable in 30 months. In this case, the estimated monthly payments will be $378.11, and you’ll have paid an excess of $1343.42 or a total of $11,343.
See that 10%? It can always change depending on your credit score. With variable types, you can expect it to change every month depending on the markets’ movements, so you need to have deep pockets with them.
APR: Annual percentage rates already include the various fees that you need to cover upon application. Taking out a new debt is costly and get an idea of the total amount that you’re paying each month with the APR. Read the terms and conditions when you’re shopping for a new consumer loan.
Other Fees: Late payment penalties, origination and processing fees, and others are all additions when you have an agreement with a specific lender. They can increase the costs of the borrowing, so ensure that you know every detail associated with your debt.
Term: The length of time where you agree to repay everything is important because the longer it is, the more you end up paying down the road. Shorter terms may seem like you’re paying more monthly, but you can also get out of debt fast.
3. Alternatives that You Should Aim For
Credit Unions: When you’re a long-time member of these organizations, they can let you borrow an amount with a lower prevailing interest rate in the market. Since they are not actively going for profits, they are more reasonable than the other competitors in the market.
Consider yourself lucky if you qualify since they are thorough in background checks. You can be eligible if you’re a resident in the area, an employee of a company, or a worker in a specific industry. Check with these professional groups to see if they have current loan offers available.
Online Platforms: Compared to banks, where you need to go in person and talk to someone to borrow, consider a fintech company that can offer a fair interest rate. Even if they are unsecured, they can still afford to give borrowers a lower APR because they don’t have to pay for the overhead expenses of operating in a physical location. Do the math and get the funds faster without leaving your home with the online financiers.
Lending Circles: Conventional borrowing might not be your cup of tea, and if so, lending circles such as your family or close friends may work out. Contributions may fund the loans, and when the borrowers tend to pay what they owe, that’s the time that everyone can recoup their investments.
You can use these extra funds to start a business, and you will be able to avoid the fees associated with financial institutions. Others may officiate these lending circles, and you can even build your credit if you’re always on time with the payments.
Obtaining a personal loan that you can use for almost anything today is easier and more streamlined than ever. Use calculators to see more about the offers and be knowledgeable about the terms. Payday lending may be an option but they have the worst rates out there where the APR alone can be up to 800%.
Avoid these types and it’s better to go directly to the dealership when you need a new vehicle or see spread out payments when you finance with your credit cards for a new phone. Select the one that suits your goals, and never borrow what you can’t afford to pay.