At some point in time, you aren’t going to have enough cash on hand to make a purchase. In these situations, a loan is the perfect solution. You borrow the money you need and pay it back over the course of several weeks, months or years. Different loans serve varying purposes, so before starting the application process, compare loans.
Home Loans (Mortgages or Second Mortgages)
Most people can’t pay cash for a home. Instead, they apply for a home loan (mortgage). The loan has an interest rate, set by the lender, which is added to each month’s payment. One of the positive features of a mortgage is the homeowner’s ability to pay off the loan over the course of fifteen or thirty years. On the downside, if the loan is not kept current, the lender has the ability to take away the home. At this time, the homeowner forfeits any equity in the home as well as the actual house. If the value of a home is higher than the mortgage, a second mortgage can be taken out against the house. This loan is used to upgrade or add different features to the home. Much like the original mortgage, the homeowner pays over the course of several years. Unfortunately, the interest rates are typically higher than that of a traditional mortgage.
Vehicle Loans
Instead of going without transportation, a vehicle loan allows a person to purchase a car and make payments. While the main concept is like a mortgage, the terms are much different. Here, the length of the loan is much shorter, ranging anywhere from three to seven years. For many people, owning a vehicle is a necessity; it gets them to and from work and all around town. Interest rates differ depending on the length of the loan or an applicant’s credit score.
Also like a mortgage, not keeping the loan current means running the risk of having the property repossessed. This means that whatever down payment was made, along with the amount of money that has already been given to the lender in the form of monthly payments, is forfeited. In the case of a mortgage and a vehicle loan, it is important to find out exactly how much you can afford before continuing.
Secured/Homeowner Loans
A secured loan is one which can only be taken out by someone who has a mortgage or owns their home outright. The reason for this is that secured loans tend to be for high amounts, and over a long period of time – anything up to 25 years is common. Because the lenders see this as high-risk borrowing, they require your home as security – if you default on the payments the lenders have the legal right to seize the property to recover the debts. The good thing about a secured loan is that because of the added security, they’re often more accessible to people with poor credit history, and the APR tends to be lower than on other types of loans.
Personal Loans
Personal loans are much more varied than a homeowner or vehicle loan. There are different reasons for taking out a loan and in most cases, an applicant does not need to provide any type of collateral. In the case of a mortgage, secured and vehicle loan, the house or vehicle are the collateral. These loans are usually for a lower amount and can be paid off in a short amount of time. While lenders may vary on the interest rate and the terms of the loan, there are some things that will remain constant. On a positive note, this type of loan can help you purchase new furniture or take a trip. However, a higher credit score is usually necessary to take out a personal loan.
Payday Loans
Payday loans are the most accessible of all the options. In minutes, a person with a checking account and a pay stub can borrow money that needs to be paid back within a short amount of time; usually, this is a few days, a few weeks or even a month. The process is easy and the amounts vary. On the downside, the interest rates tend to be higher as are the fees associated with the loan. If you miss a payment or pay late, expect to pay even more to keep your account current.