While it's always a good idea to save up to make large purchases, consolidate loans, cater for emergency expenses, and more, it's not always possible. People take loans for various reasons, including home remodeling, appliance purchases, moving costs, vehicle refinancing, and as an alternative to a payday loan. Before applying for a loan, consider your credit score and credit history as the lenders use them to determine whether to give you a loan and at what rate.
Consider your income as it impacts your ability to pay off the loan. Knowing your monthly loan obligation helps plan for how you’ll make the payments to avoid legal issues. Go for the loan that best suits your needs and ascertain the loan term, default penalty charges, and other costs. Below are the types of loans you should know about.
1. Title loans
Title loans are a form of a secured loan where you pledge your vehicle's title as collateral. Your loan limit is usually between 25% to 50% of the car's value as determined by the lender. Additionally, a monthly fee of 25% is generally charged on the loan amount, translating to an annual percentage rate of at least 300%, making it an expensive financing option. Compared to traditional auto loans, title loans charge very high-interest rates. However, taking a title loan buyout gives you access to lower interest rates and monthly installments than your previous loan.
2. Personal loans
Personal loans are a broad loan category with varying repayment terms. You can use them for anything, provided it isn't for college education or any illegal activities. Personal loans may be secured or unsecured. Secured loans need collateral such as a certificate of deposit or a car. Unlike unsecured personal loans, secure loans have lower interest rates as the lender considers them less risky. Using your property as collateral can lead to you losing it should you default payment.
Unsecured loans don't require collateral as a default guarantee. If you have a high-interest credit card loan, consolidating your debt with an unsecured loan, apply for the loan amount your credit cards owe so you can pay it off. Since unsecured loans require no collateral, lending institutions look at your credit score and report to determine your candidature for the loan. An excellent credit score will secure you better loan terms.
3. Debt consolidation loans
A debt consolidation loan allows you to apply for a new loan to pay off all other debts, streamlining your payments by leaving you with a single monthly repayment. If you have a high-interest personal loan or a high-interest debt like a credit card loan, a debt consolidation loan can help you qualify for lower rates or monthly repayments, saving you money in the long term. To secure a debt consolidation loan that increases your payments, shop for loans with lower rates than your credit card or current loan.
4. Mortgage loans
There are different types of mortgage loans to help you finance a home purchase. Credit unions and banks are typical mortgage lenders. You can also opt for government-sponsored loan programs meant for specific groups of people, including USDA loans for rural, low-income homebuyers, VA loans for veterans and active-duty service members, and FHA loans for low- moderate-income earners.
5. Payday loans
Payday loans are short-term loans that last until your next paycheck. Since payday lenders are regulated differently, your loan amount, fees, and repayment period can vary depending on where you live. It is necessary that you need good credit to qualify for these loans; however, they're predatory because they attract a high finance rate. If you can’t pay, they allow you to roll over the loan to the next paycheck, but the fees tacked on it could leave you with higher debt obligations than anticipated.
6. Home equity loans
A home equity loan is a kind of secured loan where you use your home as collateral. The amount you borrow depends on the equity you have on your home, which is the difference between the market value of your home and the amount you owe on your home. However, you aren't allowed to borrow more than 85% of the equity you have on the home. The interest rate on the loan is usually low because you use your home as collateral. Defaulting on your payments can make the lender foreclose your home, leaving you homeless.
7. Pawn Shop loans
Pawnshop loans involve taking a valuable item like an electronic or pieces of jewelry to a pawnshop to borrow money depending on the item's value. Loan terms vary for different pawnshops, and interest rates may be high depending on where you live, as some states regulate this industry. Moreover, unless you repay the loan amount in full, you'll most likely not get the pawned item back. Failure to pay back the loan on time could lead to your possessions being sold.
8. Payday alternative loans
Payday alternative loans are short-term loans provided by federal credit unions and are cheaper than payday loans. Compared to payday loans, payday alternative loans have a more extended repayment period. If you're considering taking a payday loan, first consider whether you qualify for a payday alternative loan because you're likely to save more on interest. To be eligible for a payday alternative loan, you should have membership in a federal credit union for not less than a month.
9. Small business loans
There are various types of small business loans, including working capital loans, small business administration loans, equipment loans, and term loans. They help small businesses fund their daily operations. Small business loans, especially small business administration loans, have more qualification requirements than personal loans. You may consider alternative funding such as merchant cash advances and invoice factoring, but they may be too costly for a small business.
10. Recreational vehicle loans
Recreational vehicle (RV) loans can be secured or unsecured. While small RV loans are unsecured and cheap, large RV loans are expensive and secured, with the recreational vehicle acting as collateral. RV loan terms vary depending on the lender.
Before applying for a loan, create a budget to determine whether you can afford the monthly repayments. You may also consult a credit professional for expert advice.