Millions of people take loans every year to finance wedding expenses, purchase cars, or just get some small money to get by for the next month. Loans are one of the oldest and widely used financial agreements, under which one party agrees to lend money to another party for a certain yield.
There have been many discussions on how beneficial and/or harmful are loans, and how it might be dangerous to take out loans excessively. And, without doubt, that might be true – unnecessary loans lead to the accumulation of bad credit, which it is hard to pay off then. So, one should obviously carefully consider the necessity of taking out a loan.
The most common types of loans are personal loans. They can be taken for a variety of reasons. Unlike vehicle loans or mortgages, there is no specific reason for taking out a personal loan. Interest rates on personal loans also depend on your credit score – the higher your credit score is, the lower interest rate you will be able to get.
Actually, personal loans can be secured or unsecured – i.e. they may be secured against collateral (such as a car) or not. Typically, secured loans have lower interest rates, which is something good. But if you default on a secured personal loan, the collateral will be taken from you by the bank.
These are short-term (up to 12 months), high-yield loans, which individuals might take out in emergency situations. However, payday loan lenders are notorious for staggering interest rates, hidden fees and murky conditions overall. Moreover, some American states ban payday loans altogether.
Of course, it is recommended to take out payday loans only in extreme, emergency situations. Otherwise, you would better stay away from such loans, the APR of which may amount to 400%.
Home Equity Loans
In fact, home equity loans are a type of loans, which are secured by the home of an individual. This is a good alternative to personal loans, since you are likely to enjoy far lower interest rates. Yet, keep in mind that the bank will have a right to sell your house in case of default.
Usually, the amount an individual may borrow is based on the difference between the market value of the home and how much the individual owes for that home. Ordinarily, the amount of home equity loans cannot exceed 85% of the house value.
These are special-purpose loans, which are issued to finance the purchase of the vehicle. Usually, banks allow consumers to finance the purchases of both new and used cars with such loans. However, the loan amount is much more limited for the used cars.
Since these are collateralized loans, they come with lower interest rates (however, they are slightly higher than those of the mortgages). But the credit score required by banks must be rather high, as well.
Pawn Shop Loans
This is another option of fast cash borrowing, something similar to payday loans but designed for a specific purpose. Some vendors and shops offer such quick loans to finance purchases at their stores.
Even though this may be pretty convenient, the interest rates can be rather high. Besides, the authorities are starting to clamp down on such lenders and impose additional regulations for such loans.