Personal Loans: Things To ConsiderWhen you're up against a wall, borrowing money can seem like the best financial option. It involves taking a huge risk, though: A loan can either put you on the road to success or catapult you into unprecedented ruin. That's why you'll want to minimize your liabilities by getting educated before you make any major financial moves. To be a savvy consumer, you'll have to learn what's available, who's lending, what makes you an attractive borrower, and how to define those technical terms that lenders toss around with such ease.
Types of LoansLoans can be secured or unsecured; they can be open-end or closed-end.
Secured loans are defined by the presence of assets (such as a house or vehicle), which are often the very assets you buy with the money you are borrowing. They are often made in larger amounts than unsecured loans because the collateral ensures that the borrower will meet their payments. If they don't, the creditors can repossess the collateral. Secured loans tend to have longer payoff periods and lower interest rates. Home mortgages and auto loans are the two most common types of secured loans.
Unsecured loans finance bills or services for which there is no tangible asset listed as collateral. As a result, these are based on the borrower's "creditworthiness" and appeal, rather than on material assets. For example, student debt, medical bills, and credit cards are unsecured. Without an asset to reclaim, the lender is at a greater risk. If you fail to pay, the lender can't exactly reinsert your infected appendix or revoke your college degree. He's likely to turn that risk over to you in the form of a strict payment plan at a higher interest rate.
Open-end or revolving loans do not require payment in full by a pre-set date. As long as you keep making the required minimum payments, you can keep paying and keep borrowing up to a pre-approved amount month after month. Credit cards and home equity loans are open-ended.
Closed-end loans do not extend additional credit until the original principal and interest are paid off. You get the entire amount up front; you then pay it off in installments over a predetermined amount of time. These are designed to cover a big expense like a house, car, or education. Payday loans are also typically closed-end, made for a specific amount of money and with a set payoff date.
Types of LendersFriends and Family - On a positive note, these are almost always the first place we look if we need to borrow money. When you're in trouble, it's natural to turn to your nearest and dearest for financial support. Warning: If you choose to do this, you might be endangering the relationship that made you so eager to reach out in the first place. Few things can damage a relationship as quickly as an unpaid IOU.
Financial Institutions - Banks and credit unions have traditionally been the moneylenders. Walk into any bank, and it won't take long to figure out that financial institutions are in the business of lending money for a plethora of reasons. Banks are known to limit the borrowers to whom they will extend credit, and they are typically looking to finance a home, car, and business transactions. Local credit unions may be more accommodating.
Products and Service Providers - Some retailers and healthcare facilities understand the limited finances of their community. That's why outlets such as car dealerships and furniture showrooms offer in-house financing. Similarly, hospitals provide their patients with payment plans. These conveniences may come with a price tag.
Subprime Lenders - As their alternative name suggests, these "second-chance" lenders make funds available to people who have less-than-perfect credit. Whether due to divorce, medical emergencies, unemployment, or just plain mismanagement, borrowers who have missed payments in the past may qualify for new credit through a subprime lender. Subprime loans put lenders at greater risk and tend to carry higher interest rates and fees.
Peer-to-Peer - These online companies match borrowers and lenders. Lenders get higher returns because of the low overhead costs; borrowers get convenience, lightning fast service, and privacy. While this option sounds ideal in theory, P2P loans may not be available to people with low credit scores.