Taking out a loan is an inevitable rite of passage for most people, whether they are heading off to college or are in desperate need of making a car payment on time. If they aspire to become homeowners, then a loan to establish a fifteen to thirty-year mortgage is in their future. There’s a broad range of loans out in the marketplace, and it’s essential to understand the difference between the various types that are available. Each has a set of unique requirements and implications, so educating yourself as much as possible before making any financial commitment is vital.
However, there are a few commonalities that all the loan categories share. The most critical of these collective factors to take into account when considering the loan is to consider the loan seriously. Borrowing money isn’t a decision to take lightly. Loans are sums of money that are paid out on your behalf with the expectation of timely repayment as interest accrues on the outstanding balance.
There are so many financial options when a large amount of money is required or funding is needed in a pinch, but your circumstances will ultimately dictate the next steps. The strength of your credit, the nature of the expense, and the amount required are generally the main drivers. As with any purchase, it’s always advisable to shop around and understand all your options or any other possible solutions before undertaking such a serious financial obligation.
Student loans are some of the most common loans that are issued, and probably the first exposure that most young adults have into the borrowing process. Rising tuition costs make it difficult for families to save enough for college, especially if they have multiple children who want to enroll in a university, so students and parents alike turn to the Free Application for Federal Student Aid or FAFSA to make up for the difference.
Private student loans are also available. Federal student loans typically have a lower interest rate and borrower-friendly repayment terms, while private student loans tend to have higher interest rates, along with additional fees that aren’t included in federal student loans. Whenever possible, the bulk of loans for college expenses should be secured through FAFSA. However, private loans are available to make up for the difference, if needed.
Most colleges now include a disclaimer of sorts on their websites warning students about the risks of borrowing too much money to fund their education. Prospective students must be informed that their field of study should lead to a career that will support their ability to repay any loans secured to pay for their education.
It’s rare for people to have the ability to buy a house in cash. Homes are usually the biggest purchase that most individuals will make during their lifetime. Mortgages have some of the lowest interest rates compared to other types of loans. Home loans are relatively low risk for the lender since they are secured – in other words, tied to the property. Non-payment can lead to foreclosure, and the bank can take possession of the property.
The lower interest rates don’t translate to ease of obtaining mortgages, however. The inherently high cost of home ownership requires strong applicants to ensure repayment since lenders are interested in earning the closing fees and interests, not repossessing homes whose owners have defaulted on loan payments.
Vehicles are another significant expense that most people need to finance. Like mortgages, there’s physical property tied to the loan, so it’s essential to keep on top of the payments to avoid repossession. Loans are typically offered through the car dealership during the buying process in conjunction with various incentives. While convenient, dealerships may not always offer the most attractive financing, so it’s important to shop around for the best interest rate, or refinance the loan with another lender whenever possible.
Payday advances are short-term loans with relatively high interest rates and the expectation of quick repayment. The primary benefit of borrowing from lenders like Snappy Loans is the ease and speed of obtaining loans for use in emergencies. For example, many people may turn to payday loans when they need to make a payment urgently, whether it’s rent or a utility bill. These loans can easily spiral out of control if they aren’t managed responsibly, but the loan amounts tend to be smaller, usually with a $1,000 threshold.
Small Business Loans
When looking to start a business, many people rely on outside funding. It’s common for small business owners to have little money of their own to invest other than intellectual capital, so they seek out small business loans. A successful business model will ultimately allow for a portion of the profits from the company to go toward loan repayment. Many prospective business owners look to the U.S. Small Business Administration for help, but the terms of the loan will vary depending on the nature of the business venture.
Even though you’re technically borrowing from yourself when you dip into your retirement account before you reach the legal retirement age, this is one of the strictest loans when it comes to repayment. Although it can be relatively easy to pull out the funding, there are severe tax implications if you’re unable to pay back this type of loan. Not only can you get into hot water by essentially turning the loan into an early withdrawal with related penalties, but any reduction to your retirement account can have long-term effects, even if you do manage to pay back the funds. The period of time that the loan amount isn’t working for you in your retirement account equates to untold sums of potential lost investment revenue that would undoubtedly come in handy when you have to rely on a fixed income.
This is just a sample of the available loans. Many more financial products are available in the marketplace that may be better suited to your particular situation. It’s so important to research your options to ensure you get the best financing and payment terms.