Don’t borrow trouble when looking for a loan

loan

At the end of 2006, Great Britain finally settled a loan debt from the USA of $83m – a loan which was issued at the end of World War II.  Most people, at some point in their lives, will obtain a personal loan to buy a car, pay for a vacation or to cover expenses such as home improvement.  Although, thankfully, most loans are paid off somewhat quicker than that of Great Britain, the number of people defaulting on personal loan payments has doubled in the last few years.

A personal loan can be a great way of covering the cost of a major purchase or investment but, can also lead to the misery of charges and added interest if you’re unable to repay on time.  Before considering a personal loan, you should always make absolutely sure that you’ll be able to afford the repayments, even if your circumstances change.  In today’s world, when it comes to personal loans there is a dizzying range of options available for those ready to take the plunge so, we’ve put together the following guide that can help you make the right choice.

Mortgage

A mortgage (literally translated as ‘death pledge’) is a major loan which is used to buy a property and usually has a repayment schedule spanning decades.  To find out more about mortgages, check out our blog HERE.

Secured loans

This is a personal loan from a bank or financial organization which uses your other assets, such as your home, as collateral.  When taking out a secured loan, you will sign a contract stating that, should you default on payment, the lender has the right to seek repayment through the sale of your asset or assets.  Always think very carefully about taking a secured loan as there is a possibility of losing your home should you be unable to keep up the repayments. Often, those with bad credit will find that a secured ine is the only option available to them due to their sketchy financial past.

Unsecured loans

More flexible and less risky, with an unsecured loan, you are not required to offer any assets as collateral.  The best option for short-term borrowing, unsecured loans are issued dependent on an individual’s credit score and monthly income.  As unsecured loans pose more of a risk to lenders and banks, interest rates tend to be a little higher than those of secured loans.  Unsecured loans are perfect for the occasional special purchase or unexpected expense.

Guarantor loan

Falling somewhere between a secured and unsecured loan, a guarantor loan is one which requires you to provide a guarantor – somebody who promises to cover your debt for you in the event that you default.  Most commonly a parent, a guarantor can also be a friend, partner or colleague.  This kind adds an extra layer of security for a bank as they realize that most people will be reluctant to default when a friend or loved one will be left on the hook for their debt.

Payday loan

Never far from the headlines, payday loans have gained something of a toxic reputation over the years.  A payday loan is a small, short term loan designed to help people through temporary periods of financial difficulty.  These loans will generally be between $100 and $100 and will require repayment within one month.  The reason for the bad press is that they usually come with an extortionate rate of interest which is compounded by further charges and interest in the event of non-payment or rollover – whereby the debt is extended for a further period of time.  Many feel that these payday lenders are unscrupulous as they work on the basis that their customers are generally people whose credit is not sufficient to gain a regular loan from a bank and so are, essentially, a captive audience.  A payday loan can, however, be a reasonable solution as long as you opt for the shortest repayment window and make sure that you will be able to repay dead on time.

Stafford loan

These are loans provided to undergraduate and graduate students and are designed to cover educational costs.  Stafford loan repayment schedules tend to be reasonably flexible and generally are available as subsidized – whereby the Federal government pays the interest and, unsubsidized – where the student is responsible for interest payments. An added bonus to the Stafford loan is that it’s possible to have a ‘grace period’ inbetween leaving education and joining the working world.

The bank of Mom and Dad

Ever popular for people of all ages is a personal loan from the bank of Mom and Dad.  Interest free (and often repayment free), terms are flexible with plenty of opportunity for the loan to be extended.  Repayment is generally required by way of regular visits and phone calls and a lot of gratitude !

As with any kind of credit, always remember that taking out a personal loan is a commitment – and one which carries consequences.  Should you default on loan repayments, this can impact on your credit rating which, in turn can stop you from acquiring further credit – including a mortgage – in the future and, may even affect your employment prospects.

Should you find that you are unable to repay a loan, always contact the lender immediately and be honest about the situation.  Most lenders will be more than willing to work with you to find the best way of resolving the debt. Needless to say, the worst thing you can do is to ignore any debt – this won’t ever make it go away and will only cause you further stress!

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