There’s nothing more challenging than managing one’s finances, especially if you’ve been affected by a financial hardship due to an unexpected expense, losing your employment, or other unforeseen circumstance. If you’re like most Americans, you’re living paycheck-to-paycheck and aren’t in a position to cover the expense of a major car repair or emergency medical procedure. In the event you fall into that category, it’s always a good idea to be familiar with what types of loans are available to you should you ever need one.
Familiarizing yourself with your loan options ahead of time means that you can be more decisive in the moment financial hardship occurs. Or, perhaps you don’t necessarily need a loan on an emergency basis, but are interested in building your credit via regular monthly payments. In the following entry of our blog, we’ll cover five loan types and the typical process of getting them.
Private Loan (Money Borrowed from a Friend or Family Member)
It’s good to know that you have the support of a friend or family member in the event that you find yourself in a financial bind. Borrowing money from someone you know is advantageous in that you’re not obligated to a financial institution; however, money can complicate a personal relationship, especially if you fail to hold up your end of the bargain. Private loans can become legal ordeals if you’re not careful.
In order to make sure that both parties understand each other and receive benefit, it’s always best to:
a.)Write down the full terms of your agreement with dates, amount, terms of repayment, etc. Both parties must sign and get a copy of the document. This ensures that the lender is protected should the loan escalate to a legal issue.
b.)Include some sort of interest rate in the repayment terms. This gives the borrower at least a small amount of financial incentive to grant you a loan. Paying an amount of interest lets the lender know that you appreciate the favor.
Although borrowing from a friend or family member is tempting due to the advantageous lending terms, it’s important to treat the loan as seriously as you would a traditional bank loan. This protects the lender and your personal relationship. You should also remember that borrowing money privately will not improve your credit score.
Credit-Builder Loan
As the name implies, a credit-builder loan is a loan intended to improve the borrower’s credit score. If you have bad credit or no credit at all, then a credit-builder loan may be the exact thing you need to take you in the right direction. Think of it as an introductory form of lending that is intended to establish you for bigger future loans, such as a vehicle or mortgage. Even if you don’t plan to make any major purchases in the immediate future, a credit loan is beneficial in the event you change your mind.
The following is how a basic credit-builder loan works. First, you will apply for a credit-builder loan through a financial institution, credit union, or other lending institution. You will need to provide some standard info, such as employment history, proof of income, list of liabilities, etc. The lender will put a loan balance of your choosing into a savings account (usually a small amount). You will then make fixed payments toward this loan over the course of the next several months. Your payments return the amount of the invested balance back to you.
You won’t have access to the money until you’ve completely paid it off, so choose an amount that is affordable for your situation and budget. The key factor of making a credit-builder loan work is making your payments on time, every month. Your lender will be reporting these payments to the three major credit bureaus (Equifax, Experian, and TransUnion), thus, building your credit score.
Personal Loan (Money Borrowed from a Lending Institution)
A personal loan is when you borrow money from a bank, credit union, or other lending institution that you will be expected to pay back over a period of time in monthly installments. The period of time varies by loan and individual, but you can expect a repayment period of at least 24 to 36 months.
Personal loans are usually unsecured, meaning that you won’t have to put down any collateral in order to get the loan. You will, however, need to be evaluated by the lending institution to determine how much of a risk you are. That means you’ll have your credit score pulled and the lending institution will need to see proof of income. Based upon these factors, they will determine the amount and terms of your personal loan.
One of the variables you should be aware of when taking out a personal loan is the annual percentage rate (APR). This ultimately will determine how much in interest you’ll pay over the duration of the loan. Do your research before agreeing to loan terms. APRs can be as little as 5% or well over 30%. Do not let your need for a loan cloud your judgment or rush through the process without fully understanding your loan terms.
If you are using a personal loan to consolidate credit card debt, for instance, make sure that your APR for the new loan is lower than what you’re paying on your revolving debt. Personal loans are flexible in their use (wedding funds, home improvement projects, major purchase) but they can also be an ingenious way to restructure debt.
Payday Loan
A payday loan is a short-term loan that is typically used in situations where an individual needs cash immediately. The amount of cash a person can get with a payday loan maxes out around $1,000 (based upon income and state), but what makes payday loans an attractive option for people are their immediacy (same-day approval) and minimal paperwork.
There is no credit check when getting a payday loan. All the borrower needs to supply is proof of employment, their recent paystubs, and a completed check that the lending institution holds as collateral. The loan terms are based upon your payday. For instance, if you get paid the 1st and 15th of every month, you would be expected to pay off your payday loan on those days. You will need to pay off the amount in full plus whatever interest is being charged on the amount borrowed. Once you have done this, you are free to immediately take out another payday loan for the same amount you borrowed previously or a lesser amount. Once you’ve opened a payday loan account, you can continue to borrow on it again just so long as you’re paying off the balance on your payday.
Payday loans are great for getting cash quickly, however, be mindful of the APR as they are usually much higher than a standard loan. Be sure to read the paperwork closely so that you understand the terms of the loan before agreeing to it. Also keep in mind that a payday loan does not build credit.
Car Title Loan
A car title loan shares certain similarities with a payday loan. There is no credit check, and you can count on same-day cash once your loan has been approved. Once again, this is a type of loan that’s regarded for its immediacy. The difference between a car title loan and a payday loan is that you’ll be using your vehicle as collateral. In order to do that, the car title must be free and clear of any liens. By taking out a car title loan, you are effectively putting a lien on your car.
Since the amount of your loan is based upon the value of your car and not your income, you can usually count on the max amount of money you can borrow being higher than a payday loan. The other advantage is that you get to drive away in the car that you came in, even though you’re using it as collateral for the loan.
Kansas City title loans are widely available in the local area. Make sure to take out your car title loan responsibly and with full comprehension of the lending terms. If you default on a car title loan, you will lose possession of your vehicle.
Loan Recap
Even with little to no collateral, there are several ways to obtain cash on a tight turnaround. When it comes to borrowing money, always be sure to do the following so that you don’t inadvertently default:
a.)Understand why you’re taking a loan. You shouldn’t take out a loan just because you can. The purpose of a loan should resolve a situation, not create a negative one.
b.)Understand the lending terms and what – if any – collateral you’re using. Know how much you owe, when you’re going to owe it (payment schedule), and what APR you’re agreeing to.
c.)Have a defined repayment plan. Never take out a loan that you can’t pay back. If you default, it could potentially result in loss of property and/or negatively affect your credit score.
Taking the time to go through these steps promotes responsible borrowing and decreases the likelihood of any surprises. Finally, never hesitate to ask your lending institution a question if there’s something you don’t understand about your loan. There should always be full transparency between lender and borrower.