Our modern economy runs on the fact we will earn money in the future to pay for purchases now – hence we have loans. Loans are a promise to pay back the lender with your future earnings with interest as a fee for giving you the money upfront instead of waiting (i.e., saving for it.) If everyone had to save for a house, car, or appliances, we’d have no economy to speak of!
But not all loans suit all situations. Sometimes, choosing the wrong loan type may get you into trouble. So, which loan type should you use? We show you all the common ones, so you don’t make the wrong choice.
Unsecured personal loans – for “intangibles” and debt consolidation
If you are going on a holiday, investing in the stock market, financing a wedding, or consolidating your debts, you will likely need to take out an unsecured personal loan. These are for intangible expenses – things like experiences more so than assets. The mid-four to high-five figures are best for these types of loans (unless you can afford more.) Unsecured personal loans will have slightly higher than normal interest rates – but there’s no collateral to speak of, and your bank or lender will need to offset that risk with higher rates. If you’re consolidating debts, it’s a simple way to help reduce overall debt, as every repayment you make gets you closer to a zero balance.
Secured loans – car loans, jet ski loans, RV loans
On the flip side of unsecured personal loans are secured loans. These may include the type of asset in the title – auto loans, jet ski loans, RV loans, etc. These loans are for major asset purchases, such as cars or RVs, in the five to low-six-figure range. Secured loans use the asset purchase as collateral, which means slightly lower than average interest rates.
Small loans are short-term loans that help you cover unexpected expenses such as appliance failure or sudden medical bills when cash is tight. You can get a loan for a small amount – about $300 to $5,000 (in extreme circumstances). These should be used only in emergencies and only to cover what you need. In some States and jurisdictions, the amount you may borrow may be capped.
Mortgages or home loans are for – you guessed it – houses or apartments. They require a lot of due diligence and checks to take out and are complex legal arrangements to facilitate the purchase of a residence. These are specially reserved for a house that tends to appreciate in value – whereas the other loans mentioned are for assets that depreciate or lose their value. Mortgages can be fixed at a rate for a certain period or variable. This means the rates go up and down as the market does.
Revolving credit or a line of credit is a loan with no fixed “term” – much like your credit card. Revolving credit means you have a limit you can borrow each month which carries over to the next month. You can make a minimum repayment to keep using the credit, but you will be charged interest on the part you don’t pay off (unless it has interest-free days).
Special business loans, such as chattel mortgages, allow you to borrow more than the asset’s value – but are reserved for business purchases. Contact a financial adviser if you’re stuck on which loan to get.
Featured Image by Credit Commerce from Pixabay