There are so many financial products available that choosing the right one might be challenging. Knowing as much as possible about different loans will help you decide which one is best for you. Forewarned is forearmed, and the more you know, the better off you will be.
Many people make poor financial choices because they do not sufficiently understand the implications of these decisions. Nor has anyone explained these risks beforehand. To avoid being caught in this trap, know your loan products and when each is applicable.
1. Payday Loans
If you are in a pinch and need a small sum of money fast, same-day payday loans are precisely what you need. Applications for these loans are quickly processed, and you could have the cash in hand within a matter of hours. Payday lenders are not as concerned by your credit score as others, making these products ideal for people with a less than stellar financial history.
As an applicant, you can select how much money you want to borrow and how much time you need to repay it. You will be given a few weeks to settle the debt as soon as you receive your next salary payment for smaller amounts.
When borrowing larger amounts, lenders will offer you an instalment plan, where you repay the debt weekly, fortnightly, or monthly. As with any loan, there is interest attached to payday loans. When you miss payments, there are additional interest charges.
To qualify for a payday loan, you complete an online form and submit some documentation verifying your identity, address, employment status, and income. Lenders offer different interest rates, so be sure to shop around online before settling on one.
Unfortunately, the payday loan industry has been littered with fraudsters running illegal, unregistered operations. To avoid falling prey to these companies, which are nothing but loan sharks, check your lender’s credentials and insist on having your entire agreement in writing.
2. Personal or Short-term Loans
These loans are ideal for borrowing larger sums of money. You have longer to pay it off, making the instalments more affordable. Like payday loans, personal loans are unsecured, meaning that you do not need to offer collateral assets to obtain them.
During your application, you can choose how much money you want to borrow and how many years you wish to pay it off over. Lenders have maximum terms for short-term loans, with the average being seven years.
However, there are options for paying off a personal loan far sooner than that. It makes sense to get out of debt as soon as possible, but you cannot do so at the expense of not making payments because you have made the repayment period too short.
Most people take out personal loans to finance large purchases, such as a vehicle. These loans are also perfect for people wanting to make improvements to their homes. You can use the money from a personal loan to renovate or extend your house, thereby adding to its overall value.
Other borrowers use personal loans to consolidate their debt into one monthly repayment. They use the loan amount to pay off credit cards and other accounts. This approach helps when they have overextended themselves financially.
3. Long-term Loans
The most common long-term loan is a mortgage. A house is the most expensive asset you will ever buy, and you need a large loan and plenty of time to pay it off. This is what a mortgage loan offers.
Long-term loans are secured, meaning that there is collateral offered against them. In the case of a mortgage, the house you bought is used as security, and the lender can repossess it if you fall behind on payments.
Due to the amount of money involved in a long-term loan, there is plenty of paperwork to complete and many steps in the application process. However, it is the only way most people can afford to get onto the property ladder.
All loans come with interest, as this is the lender’s source of income. Interest rates vary from one lender to another, and they also differ according to the nature of the loan. Long-term, secured loans have a much lower interest rate than unsecured, short-term loans.
When applying for a loan, be clear on the interest rates being charged. Some banks and companies offer clients a choice between variable-rate and fixed-rate loans. Variable-rate loan repayments fluctuate with the central bank’s prescribed interest rates.
This is to your advantage if these interest rates decrease, which is common during an economic slowdown or recession. However, there is an equal chance that interest rates might increase.
Fixed-rate loans come with a repayment amount that will not change for the duration of the loan. Many borrowers opt for this as they will face sudden increases in repayments that they cannot afford.