The Kind of Loans that Exist and Why You Might Get Each One
You may look into loans at some point in your life. They can become viable options if you need money fast. You should know that different loan varieties exist, though.
For instance, you can look into vehicle title loans, or perhaps you'd prefer a home equity loan. You might get either a secured or an unsecured loan.
We'll talk about these different loan types in the following article. If you need money and you think that a loan makes sense, you'll soon know about the most common options that you might pursue.
Secured loans mean ones where you put something up as collateral. You might own a house or a car. Perhaps you have a boat, some valuable collectibles, or some rare or antique jewelry.
Anything like that might get you a loan. You must approach a credit union, a bank, or some other lender. You can find brick-and-mortar locations like banks where you might get a loan, or you can also find online sites where you can get one.
Either way, you must apply, and the lending entity will give you the money or turn you down. The approval process does not usually take long, so you can quickly get your answer.
With secured loans, you're risking the item that you're putting up. That's because the lending entity, assuming they give you the money, will now have a lien on your car, house, etc.
A lien means they have a monetary claim on that item. If you cannot pay off the money you borrowed, then the lender can legally claim the valuable item eventually if you won't give them their cash.
Usually, you can keep fighting this process for some time. If you keep paying off the money you owe, then you can often get clear after a while.
Only when you have no money and no way to get it will the lending entity take the car, house, or whatever else you put up as collateral. These unfortunate situations sometimes happen if you're in dire financial straits.
Title loans involve you using your car as collateral. You have the car and title that indicates you own it. You can get money this way if you don't have a steady job or a very good credit score. This scenario might work if you need cash fast and you know your car has some value.
These loan types aren't one or two-year loans. You must pay back the money very quickly, usually within a few weeks.
You will also pay a steep interest rate with the loan in most cases. That high interest rate makes these loans worthwhile for lending entities. Most lenders run for-profit entities. They're not just giving you the money because they're humanitarians.
Home Equity Loans
Home equity loans also fall into the secured loan category. If you own your home, you're leveraging the equity you've built up in it. You can approach a lender and get some money that way.
Of course, like a title loan, this strategy carries some inherent risk. If you cannot repay the home equity loan in time, the lender might repossess your house. If that happens, you might move in with a relative or get a small apartment.
In extreme cases, some people who get home equity loans and then can't pay them back become homeless. It's rare, but it does happen sometimes.
If you get a home equity loan, then that probably means you've exhausted your other options. Maybe you'll do this if you have some hefty medical bills or you owe some other entity. Perhaps you have outstanding student loans, credit card bills, etc.
You also have unsecured loans. These ones don't require collateral, like your house or car. Instead, the lender probably feels that you have a good credit score and a reliable job, and they'll willingly loan you money because you seemingly have financial stability.
Unsecured loans usually work better for you as a consumer if you can get one. That's because, for the most part, you can get lower interest rates with unsecured loans than with secured ones. That's provided, of course, that you have a steady job and a relatively high credit score.
If a lender feels you can pay back the loan on time, they might give you an interest rate of anywhere from 5-9%. Most people consider that pretty good.
If you get a secured loan and put something up as collateral, you may get a higher interest rate. You might pay anywhere from 10-25%.
Which Kind Should You Get?
If you can get a loan with a lower interest rate, whether it's a secured or unsecured one, you always want that. That interest can pile up, and if you can pay very little, that's preferable.
The kind you should get varies. If you've got a low credit score, you probably can't get an unsecured loan from most lending entities. They will turn down your application.
At that point, if you really need the money, you can leverage whatever you have that's valuable, like your house with a home equity loan or your car with a title loan. You might also come up with something else that the lender might accept.
If you can get an unsecured loan from a reputable lending entity because you have that combination of good credit and a steady job, though, you probably want that instead. You can likely get a lower interest rate and also won't risk anything that you value. Most people prefer that.
Usually, you want to avoid getting any loans unless you can't work to make money or get it through other means. Almost all lending entities make you pay interest on the loans they give unless you have a family member or friend who will lend you some money. If someone you know lends you the cash, maybe they won't charge you any interest.