Types of Loans
A personal loan is a loan that is given without needing any assets to secure it. The loan is based on your credit rating. A high rating will mean a successful application and lower interest rates; a low credit rating will mean higher rates – if you get a loan at all.
When applying for a personal loan, make sure you know about any application fees or charges before you begin.
Bad Credit Loans
The likelihood of getting a loan decreases with a lower credit rating, and even if you do manage to get one, the interest rates will be high. This reflects the high degree of risk associated with lending money to someone with a poor credit history.
There are ways to compensate for that risk though. If you have someone willing to act as a guarantor for your loan, the lender will consider their credit rating or securities as well. If you fail to pay the debt, the guarantor is responsible to do it for you.
A poor credit rating is also not a permanent thing. You may not be able to borrow money now, but with some care and effort, credit ratings can be improved in a reasonably short time.
Pro’s and Con’s of Loans
The pros are easy – you get money right now, for something you want or need. You haven’t worked for it yet, but someone who has the money, lets you reap the benefits of it.
Along with this, getting a formal loan (i.e. from a bank) and paying it off successfully can increase your credit rating, making it easier to borrow money, secure a rental property, or in some cases even get a job.
The cons are a bit delayed, but very real. Loans carry interest, which means anything you buy with borrowed money actually costs you more. There is also the risk of a change in your circumstances that prevents you from paying the money off as intended. This can hurt your credit rating and have additional consequences.
A secured loan is one for which you risk your own assets in trade for the loan.
If you don’t pay back the money as agreed, the lender can assume possession of your property. If your property doesn’t cover the full amount owing, you are still liable to pay that back.
Help you with budgeting
Loans are typically paid back at a set rate over a set period of time. They don’t normally change with interest rates, and so it is easy to know exactly what is due on a loan, and when. Nothing unexpected means that they are budget-friendly.
Loans can help pay for special events, like weddings. Instead of having to save up for a wedding, a couple can get married right away and pay off the wedding over their first few years of marriage.
Debt consolidation loans
A popular use of loans is to consolidate other debts. If you have several debts, especially high-interest ones, you can borrow enough to pay them all off. You then make only one payment, instead of several, which helps monthly budgeting, but you also will likely get a better rate of interest, which can save money overall.
FAQ’s on Loans
Interest rates vary, but are usually higher for smaller amounts, and lower for larger loans. Interest rates on shorter term loans are usually at a set rate.
Term of the Loan
The term of the loan is the amount of time it will take for you to pay off the entire loan, with interest. This is usually longer for higher loans, as there is more to pay off.
Credit record is perhaps the most important factor when takin gout a loan. It affects the interest rates offered, the amount you can borrow, and even whether you can borrow money at all.
You can pay off a loan earlier than agreed upon, but this can sometimes come with early repayment fees. These fees are to compensate lenders for interest they would have learned if you had taken the full amount of time to repay the loan. If there is only a small amount remaining, it is better to pay it off over the full term.
Taking out payment protection insurance
Your lender may offer to sell you Payment Protection Insurance (PPI), which will cover your payments in the event you fall ill, lose your job, or are injured and cannot work. Prices for this cover vary, so it is worth shopping around.