Personal Loan
When I talk to my friends about personal finance loans, I’m constantly surprised by their lack of knowledge about the options available to them. For example, many people aren’t aware that they can get an unsecured loan, like a cash advance, or that they can get a line of credit that uses their home as collateral. It’s important to know all of the options available to you, because one of them might come in handy one day.
Consumer loans can be separated into two categories, secured and unsecured. Secured loans are tied to collateral (aka asset). That means your house, your car, your condo or rental property (that you own) can act as collateral. Banks like collateral, because it means if you can’t pay back the loan, they can take your car or property in order to receive payment. Whereas, an unsecured loan is not connected to any collateral at all.
Examples of Secured Loans
Car Loans
These can be borrowed from a bank, credit union or a financing option through the dealership. Interest rates are calculated annually on car loans.
Title Loans
A Title loan is taken out using the Title of your car as collateral. You can usually get up to $4000 for a Title loan, and the interest rates are high. These are usually acquired in less than an hour.
Mortgage Loans
This type of loan is one of the most widely used. Mortgages can be fixed or flexible. For example, you can get a fixed rate loan that has an interest rate that never changes or you can get a flexible rate that offers a lower interest rate, but must be renegotiated after a set amount of time.
Lines of Credit
A line of credit can be taken out by putting up property as collateral. These can be used to start a business or make home repairs (also called a Home Equity Line of Credit). You will usually have to start paying interest immediately after accessing the money in this type of loan.
Examples of Unsecured Loans
Credit Cards
Credit cards give you a set limit of loaned money, or credit. Interest rates on credit cards are variable and additional fees can be tacked on to the balance, so be careful. Credit Card companies frequently offer incentives to get you to spend using the card.
Cash Advances
These type of unsecured loans are taken out for an amount no more than your paycheck. Often used in time of an emergency, and often times referred to as payday loans, they carry a higher interest rate, but are designed to be paid back quickly.
Student Loans
Student loans mark the beginning of “real life” debt and are even classified as good debt. They usually have a low interest rate, and are flexible about payments and even payment due dates. Student loans are set up on an extended time period scale.
When it comes time to get a loan, remember to shop around. A small lender on the corner may offer you a better interest rate than the bigger lender down the street. Do your research and find out what you’re getting into. Lastly, make sure you have a plan of attack to get the loan paid off within a timeline that is comfortable and doable.
