Money is tight from time to time, and life can be expensive, so paying for things outright is not always a viable option. When things get financially tougher like this, it is reasonable for us to seek out taking a loan. Borrowing varies though, and different loans and different lenders will come with varying interest rates, potential for collateral, terms and conditions and so forth.
Whether you are taking out cash advance loans, a personal loan, or a home equity loan, you need to consider whether it is worth you doing so, do you really need this loan? Consider your credit score, your financial history, and if you will get a decent interest rate.
Also consider if you have alternatives to taking out a loan. If you only need a small amount, like you would get using a payday loan, is there a chance you could borrow from a family or friend instead?
Taking out a loan is not always the only option, and sometimes taking out a certain loan type can be a bad call, so how do you know when you should get a loan?
Types of loans.
Before you jump the gun on getting a loan, it is best to understand the type of loans on offer. The two main types of loans are secured and unsecured. A secured loan will typically have a lower interest rate, but the loan will be secured by collateral. This includes things such as home equity loans wherein your home would be used as collateral in the event you cannot pay back the loan fully as agreed.
Alternatively there are unsecured loans, these types of loans are the favored options, although they will have a higher interest rate, none of your possessions are used as collateral, personal loans will typically fall under this specification.
There are different types of loans for different things, so if you need to buy a car, or a home, then you will need specific types of loans for this, and these will often be secured loans. If you are starting up a business, you will need a business loan. If you want to fund a vacation, college, or just make a large purchase then a personal loan is best.
Understanding which type of loan you need for your purchase will help you understand the securities around the loan and if it is really necessary. I.e. If you are taking out a home equity loan to purchase a house, then this loan is likely unavoidable but will come as a secured loan.
Yet, if you are thinking of taking out a personal loan for a vacation, you can look into alternatives. Using savings, or choosing to delay the vacation in order to generate savings, is an option.
When should you get a personal loan?
Thinking about personal loans, when is getting one of these loans a viable option? These loan types can be used for almost anything. Some lenders might want to know what you seek out the money for, however some will just want the surety that you will pay it back.
These loans are not inexpensive, but they can be a good option in some circumstances. These loans are unlike mortgages or car loans, as they are not secured by collateral, although you can get secured loans it is recommended. They are often less expensive than credit cards and other loans, but they can be more expensive than other types of loans.
Considering a personal loan is viable should you not be able to qualify for a low-interest credit card, if your credit limits on your credit card does not meet your current needs, if this type of loan is your least expensive borrowing option, or if you have no collateral to offer for another loan type.
It is also viable should you need to borrow for a short and well-defined period of time, as these will typically only run for 12-60 months.
When should you avoid getting a loan?
Getting a loan is not advisable for those who have a bad credit score, though it is unavoidable in some cases, a bad credit score may make getting a loan hard or even impossible. Should you be able to get a loan, the interest rate is likely to be very high, which could end up drawing you into excess debt.
If you seek a personal loan, then it is best to avoid ones that are no-credit-check-loans, if they do not check your credit then they cannot accurately assess your ability to afford it, meaning that there is more risk for them, and you will likely get higher interest rates.
What should you consider before you take out a loan?
Before you go to take out a loan, check your credit score, getting an idea of your credit score will help you understand what kind of rate you will get, but also know you may not always get the rate that you see.
Consider if you really need to take out the loan in the first place, if you are already in debt, do not work yourself into even more. And sometimes remember a credit card is the better option than a loan.
