Most of us have had instances where we really wanted something but just couldn’t work it into our budget at the time. For some of us, it may have been a great deal on that dream house or a long-desired vacation. Yes, life can be “unfair” like that sometimes and many people often turn to loan providers when it is absolutely necessary.
Loans are lifesavers, literally. When faced with a health emergency, for example, a quick loan might be just what you need to save yourself or that loved one. Knowing that for the most part you have access to funds that are not technically yours brings some level of assurance that you can always get out of an emergency. However, if you were paying attention, you would have noticed that we said “for the most part”; now, what does that mean?
Well, while loans are technically available to everyone, some requirements must be met before they can be granted, and this is where things become a little frustrating. Some loan application processes can be quite lengthy and complicated while others require a high credit score to qualify. Usually, many borrowers aren’t knowledgeable about these processes. Consequently, they end up taking out loans with ridiculous interest rates that would only further weaken their financial stability. Click here to learn more about credit scores.
Having a solid understanding of the types of loans that are available to you and the application processes involved in each is extremely important. In this article, we’ll dive into what consumer loans are, exploring the types that exist, and popular consumer loans.
What are Consumer Loans?
These are loans or credits granted to a borrower by a lender or loan provider. They are given to cover any type of expenses or purchases depending on its type. There are two main types of consumer credit or advance, namely secured and unsecured loans. Mortgages, credit cards, personal, auto, student, and small business loans, are common examples of this type of loan.
Unsecured Loans
These are credits or advances that do not have any type of collateral backing them. However, because of the high risks that providers of this type of loan face, the qualification requirements are tight and application processes are thorough. In simpler terms, only borrowers with stellar financial records, credit score and credit history qualify for such advances.
This shouldn’t come as a surprise to anyone, seeing as lenders have no collateral that can be used to cover the cost of the loan should the borrower default. These steps are taken to minimize their risks as much as possible. That said, if a borrower ends up defaulting, a lawsuit is really the only option available for a lender to recover the borrowed funds.
As we’ve already established, when it comes to unsecured advances, creditors have more to lose. As a result, interest rates on these types of credits are much higher than what one would typically find with credits that are secured. Some have interest rates that are as high as 10.99% per annum. A credit score in the mid-600s is the minimum to even qualify for an unsecure loan. To get the lowest rates, one would need a credit score of 740 and above.
Advantages and Disadvantages of Unsecured Loans
If your credit score meets the minimum requirements, then you might want to know all your options. Here are the pros and cons of unsecured advances:
Advantages
- There are a number of lenders to choose from for customers that meet all the qualification requirements, including having a high credit score, being a high-income earner, and having a great financial record.
- While there are a lot of tough requirements and a rigorous application process, funds are generally paid out much faster. It isn’t uncommon to see funds paid out within 24hrs of approval. Check out forbrukslån.no/lån-på-dagen/ to learn more.
- With collateral not being one of the requirements when applying for this type of loan, borrowers lose none of their assets to the lender if they default on their payment.
Disadvantages
- Unsecured advances have shorter repayment terms or tenure.
- Amounts paid out are usually smaller than what will be offered for a secured loan. This is because the risks present are much higher. The absence of collateral also puts the lender at a disadvantage.
- Interest rates are way higher.
- The requirements for eligibility or qualification for these credits are tough. Only those customers whose financial records suggest beyond reasonable doubt that repaying the debt will be no issue, have their applications granted.
Secured Loans
You’ve probably already guessed what these types of loans are and how they work. Unlike unsecured advances, these are backed or protected with either an asset or even more than a single asset. This is what is known as the collateral. As part of the requirements for this type of credit, applicants must provide collateral with a value that is equal to or higher than that of the borrowed amount. If the borrower defaults, the lender has the right to liquidate the asset to recover the borrowed funds.
Providers of secured loans have a lot to gain even when a borrower fails to repay their debt. Here’s how; just in case you are wondering. For instance, a borrower tenders a piece of property as collateral for a loan. If the debtor defaults, the lender has two options.
One, sell off the asset immediately and recover the money or wait for the property to appreciate and then sell it off for a profit. Most lenders would probably settle for option two, seeing as real estate typically appreciates over time.
Advantages and Disadvantages of Secured Loans
Consider the following before applying for a secured credit.
Advantages
- Eligibility requirements are less demanding and qualifying for these types of advances is easy.
- Because the credit is secured with a collateral, credit amounts are usually large, sometimes running into 10s and 100s of millions.
- The interest rates are generally lower than what you’ll get for unsecured loans.
Disadvantages
- There are often expensive origination or arrangement fees and other costs that could make taking out the advance not worth it. Usually, these extra costs are included in the Annual Percentage Rate Charge (APRC).
- Should a customer default in their repayments, they can lose the assets they put up as collateral.
- Repayment tenures are usually long and could spread out over several years. However, customers might end up paying a higher interest in the long run.
Common Consumer Loans
There are several consumer credits that are available to the public which cater to different needs. They include:
Student Loans
College tuitions have gotten more expensive in recent years and most college students struggle to pay them. Student loans are available for students like this, and application process are usually straightforward. You don’t need a credit score and primary requirements usually include proof that you’re a student. However, some require that you have a certain minimum GPA to qualify.
All that being said, if you’re a student who needs financial support to get through college, you’re better off taking the federal student loan provided by the government. Interest rates are generally the lowest and you only begin repayment after graduation. We should also mention that there are subsidized and unsubsidized federal student loans. It’s therefore important that you take some time to really find out what type you are going for.
Mortgages
Most people purchase their homes with the help of mortgage loans. Several surveys have shown that buying a home requires more money than the average customer will make in a year. With a mortgage, individuals and families can own homes and then spreading the payment over some years.
The most popular variation of mortgage is the 30-year-fixed-rate mortgage that allows the homeowner to spread payments over a 30-year span.
Final Thoughts
Consumer loans can be a great way to take care of an emergency or acquire an asset that you otherwise wouldn’t be able to afford. However, things could get ugly quickly when a mistake is made. Aside from knowing which type of credit to go for, customers should ensure that they patronize only reputable lenders.