Prior to securing a loan, you need to consider a plethora of factors: choose a type of loan (which can range from a payday loan to a mortgage), consider your previous credit history, find a reputable lender, and so on. Whichever loan you choose will fall into one of the four basic categories: unsecured, secured, fixed-rate, or variable-rate loan. Here’s your brief guide to the key loan categories that will help you make a well-informed choice.
1. Unsecured Loans
An unsecured loan is a loan that does not require collateral, such as property, a vehicle, or any other asset. Lenders who approve unsecured loans do so primarily based on an applicant’s creditworthiness. A low credit score will have a negative impact on your interest rates, leading to fewer loan options and higher interest rates. A high credit score, on the other hand, will result in better loans, as well as lower interest rates.
If you have a bad credit history, getting an unsecured loan might become a difficult process. Some lenders have a higher approval rate, but they may offer extremely high interest rates and shorter repayment terms, so be sure to always read the fine print. Whether you are looking for a lender on the Internet, checking out apps like the payday loans app, or going to your local bank, be sure to always check the terms and conditions and ask for additional details when necessary.
2. Secured Loans
Secured loans, in contrast to the previous category, call for collateral. You can pledge financial assets like stocks and bonds or physical assets like your car or home as security for a loan. Starting with auto and mortgage loans and ending with home equity loans, many loans require collateral.
Secured loans usually allow borrowers to get more money, obtain lower interest rates, and have longer repayment periods. Take into consideration that secured loans can be quite risky, as borrowers can lose the assets that they used to secure the loan if they don’t repay the debt.
3. Fixed-Rate Loans
A fixed-interest rate loan is a loan that does not change throughout the entirety of the borrowing period. It means that a borrower will pay the same amount every month. There are many advantages to choosing a fixed-rate loan: predictability, the opportunity to budget and plan in advance, and the possibility of calculating the whole cost of borrowing as the interest rate doesn’t oscillate. Take into account that, depending on the interest rate environment, a fixed interest loan can lead to potentially higher repayment amounts.
4. Variable-Rate Loans
Unlike fixed-rate loans, variable interest rate loans are always a gamble. Depending on the current market interest rate, the monthly repayments will oscillate and become lower or higher. These loans can be very unpredictable, so monthly budgeting will be hard to plan beforehand. In a nutshell, you will benefit if the interest rates go down, and you will lose if the interest rates go up.
When browsing for a loan, you need to consider several factors: whether you need collateral to secure a loan, whether your interest rates will go up, if the current market interest rate changes, how much you will be able to pay monthly, etc. Before signing any contract, inform yourself, read the fine print, make sure that you understand all the terms and conditions, and ask for additional information when necessary.