Most people will at some point in their life consider taking out a loan. There are a lot of different types of loans, and for people new to loans, it could be a confusing process.
The loan process requires a lot of planning, and you need to be certain that you have found the best lender and best loan.
This article will look at the types of loans, and how to know which loan is right for you.
Types of Loans
First, you will have to decide which type of loan you need, as well as the loan amount. This will depend on what you intend to use the loan for.
For example, if you are looking at home loans, you should consult with a mortgage broker to help select one of the many mortgages available.
Some loans come with rules on how the money can be spent. Car loans must be used to purchase a car, home improvement loans can only be used for renovation projects.
Personal loans are more general and can be used for a variety of expenses. Business loans are used to operate a business.
Same day cash loans come with a high-interest rate but quickly provide you with money. Please see pros and cons of payday loans for more information on payday loans.
It is up to you to decide which loan features will suit your needs.
Interest Rates
Once you know what type of loan you need, you need to consider the interest rate. The interest rate is the added percentage of charges that the lender adds to the loan repayments.
Interest rates can be variable or fixed. A fixed rate means your interest rate amount remains the same with each repayment.
A variable interest rate is usually lower than a fixed interest rate, however the interest amount changes over the loan repayment term.
As lenders compete with each other, it is best that you compare loans and find an interest rate that works for you.
Fixed rate loans may come with higher repayments, but they allow you to budget all your repayments.
Down Payments and Loan Agreement Terms
The next step when choosing a loan is to consider the down payment. Certain lenders require a down payment during the initial period, and the larger the down payment, the less interest you have to pay.
Some lenders won’t require any down payment at all.
The terms of the loan are also something to consider when looking at loan options. The loan term refers to how long you will be repaying the loan, and what the repayment amount is.
A shorter loan (whether it is a fixed-rate loan or has variable interest rates) will require higher repayments but have less interest payable.
It is in your best interest to repay your loan as soon as possible to avoid getting bad credit and to keep your annual fees low.
However, just make sure that your loan does not charge extra fees if you pay your loan off early.
Secured or Unsecured Loan
If you select a personal loan, it can be secured or unsecured. Secured loans are taken out against your assets, like your property or car.
Unsecured loans are not directly tied to an asset. That means that if you are unable to pay, your creditor has no asset to sell to get their money back.
Because of this, unsecured loans have a higher interest rate, as the lender is taking more risk to lend you the money.
Home Loans or Personal Loans?
A home loan traditionally comes with a very long payment term, up to twenty years. Personal loans on the other hand have repayment terms that are only a few months long, between 12 to 72 months.
In terms of interest rates, you do get variable rate home loans, however, their interest rates remain lower than those of personal loans.
If you have already taken out a home loan, and are planning on doing some renovations, the best option might be to simply extend your home loan and not take out a personal loan to cover the renovations.
The interest rate and term will be much better on a “further” loan.
You can also get home loan offset accounts. An offset account is a special type of bank account, and any money in this account offsets your home loan repayments.
Your Credit Score and Your Financial Situation
Your credit report will determine what loan is right for you.
For example, your lender will look at your current financial situation as well as your credit score to determine whether they want to give you a loan, what the interest will be, and what the loan term is.
Your credit score is calculated by looking at past credit reports to analyse your debts and how you have repaid previous loans.
Your financial situation will be determined by your income and expenses.
Final Thoughts
The information above will help you find a loan that suits you and your budget.
By doing just a bit of research, you can easily find a lender and loan type that will help you out in a tight financial situation.
