When it comes to taking out loans, you need to select the right one. Several options are at your disposal, and you must choose the one that best suits your needs and budget. The reason you need money, how much you can afford to repay, and how long you need to settle the debt are principal factors that determine the loan type you require.
The larger the loan amount, the more scrutiny your loan application receives. All banks and lending companies have set application processes that candidates must follow and complete. Here is some guidance for choosing the best loan product:
Unsecured loans are those for which no collateral is required. The lender cannot seize an asset if you fall behind on repayments. These loans are typically made with short-term repayment plans, such as personal or instant payday loans.
Personal loans have a longer repayment period consisting of more instalments than payday loans. As a rule, a payday loan should be repaid within weeks or a few months. Personal loans range from 1-7 years in their repayment duration. Payday loans are for small amounts ranging from a few hundred pounds to a couple of thousand. Personal loans are for larger borrowing amounts.
Advantages and disadvantages of unsecured loans
Several options exist for applying for such loans, including online applications. Banks offer personal loans, while private lenders also offer them in addition to payday loans.
The application procedure is straightforward and can take a matter of hours to process. This gives the borrower near-instant access to their funds. Settling a debt in a short period leaves you unencumbered by debt that hangs around your neck like the proverbial millstone.
A lender automatically charges more interest on an unsecured loan because there is no collateral involved. This higher interest rate affects your repayment amount. A failure to adhere to your loan agreement might not result in the seizure of assets, but it could get you into trouble with the courts.
A lender will hire debt collectors if you do not repay your instalments. Failing that, they could take you to court, where a judge will issue a finding against you in their favour. This court order will force you to repay what you owe.
Each unpaid instalment accumulates additional interest, which increases the monthly amount due. Non-payment also adversely affects your credit score, jeopardising future loan applications.
When to apply for an unsecured loan
If you need a small amount of money to pay for something immediately, a payday loan is advisable. To avoid spending too much on interest, repay the loan as soon as you receive your salary.
Personal loans are ideal for financing a vehicle purchase, paying for home improvements, or consolidating debt. Many people take out personal loans for the latter reason.
They use the funds to settle existing credit card debt or other accounts to avoid having their credit score affected, having debt collectors pursuing them, or being sued in court. Then they pay the personal loan off, one instalment at a time. Other uses for personal loans include financing a family holiday or starting a business.
These transactions have an asset attached to them and are taken out over a much longer repayment period. A prime example of a secured loan is a mortgage. When you apply for one, you put the property up as collateral.
If you miss a certain number of repayments, the bank can repossess your house and sell it to regain its money. The same principle applies to a vehicle finance loan. The term is shorter than that of a mortgage, but you offer the car as collateral.
Advantages and disadvantages of secured loans
You can borrow substantial sums of money when applying for a secured loan, far more than what you can access on an unsecured one. However, this means that lenders have more stringent vetting procedures when processing an application. It requires a lot of paperwork and supporting documentation to become eligible for a secured loan, especially for a significant amount of money.
The duration of a secured loan entitles borrowers to lower interest rates. Repayments on identical loan amounts are much lower with a secured loan than those of an unsecured loan, making them more affordable.
When to apply for a secured loan
These loans are ideal for larger transactions, such as buying a house or a brand-new car. You need more time to repay them, and secured loans have an extended repayment period. In the case of a mortgage, you can elect to pay the loan off over 20-25 years.
A secured loan is a long-term commitment, and you risk the chance of losing an asset or having your credit history severely damaged by non-payment. Therefore, these repayments should be prioritised in your budget.