The world of loans and financial credit can seem a little murky at times. For every honest lender, it feels like there’s an unscrupulous provider with shady terms right around the corner. While it’s true that some financial institutions don’t have your best interests at heart, the vast majority are highly dependable.
So, there’s no reason to fear the word ‘loan.’ Whether you need support with school fees, buying a new car, or putting down a deposit on a house, the right credit plan is out there. The first step towards lending success is understanding the options. When you know what and why you can borrow, it’s easier to fulfil your money needs.
This guide to the most common types of loans will help you get to grips with the basics.
It makes sense to start with debt consolidation loans because they’re often misunderstood. This is a form of credit which, in the short term, pays off a string of individual debts. So, for example, if you owe money to several credit card companies, consolidation pays off the balances with a single large sum.
The benefit of this is that, instead of paying out money to lots of different companies, you only pay a single sum to the consolidation provider. There is less interest, fewer complications, and a much simpler repayment plan. Normally, this option is recommended to people facing substantial money problems.
Mortgages are long term loans which allow people to buy properties. The majority of individuals could never afford to pay for a house up front. However, they can lend the sum from a bank or financial provider and pay it back in manageable monthly instalments. Mortgages have the lowest interest rate of all loan types.
The downside to a mortgage is that the ability to repay is tied to the property. If at any point you cannot meet the agreed payment terms, there is a risk of losing the house. It should be noted that this doesn’t normally happen right away. There are different forms of support that you can use to avoid foreclosure.
Just like mortgages, automotive loans are tied to the object you purchase. It means that the vehicle can be confiscated if you don’t keep up with payments. It is common for car dealerships to offer their own lines of credit, but they are not as regulated as conventional bank loans. If possible, take a loan out with the bank and not the retailer.
Dealership loans carry higher rates of interest. There is also less support if you get into trouble with payments. Try to be sensible when requesting a sum, as you’ve got to be able to pay for insurance, tax, and maintenance on top of the monthly premiums. Only take out money that you’re sure you can manage to repay.
Personal loans are a little less limiting, in that they don’t apply to any specific purpose. You could take out personal credit for a wedding, big holiday, business venture, or to help you meet household bills. In some cases, this type of credit may be used to settle other unsecured debts, so that a lower amount of interest accrues.
Lenders have their own rules for personal finance and what one company considers viable, another might reject. Your eligibility for a loan like this will depend on your current credit score, salary, and financial history. Ultimately, you should only be taking out personal loans if you have a viable plan for repaying them.
The Best Way to Apply for a Loan
The first thing to do is check your credit score. There are lots of free tools on the internet which will help you achieve this. Knowing your financial status is important because it determines how likely your application is to be approved.
It is not impossible to get a loan with poor credit, but you may have a smaller number of options. It is always best to be aware of this before proceeding, as applying for loans and getting a rejection can further damage your score. Hopefully, this guide to loans has helped you understand your options when it comes to financing.