Whatever led you to the decision of taking a loan, you need to make sure it doesn’t do more harm than good. Loans come in different forms, shapes, and purposes, so considering all the features and choosing the one that fits your needs is crucial. But how?
Let’s start with a simple questionnaire which will help you to start with a clearer understanding of what you need:
- How much money do I need?
- Can there be any costs I haven’t considered?
- How do I want to repay the loan?
- Am I able to make monthly payments?
- Can I do without a loan?
These simple questions will help you understand in which direction to move.
Things to Consider Before Choosing a Loan
All types of loans have features that define what they are intended for and how you would rather use them. So, let’s touch on them one by one.
One thing is certain about interest rates: we all want it to be low. But let’s look at two different types of rates that can change our overall experience with the loan. So, we differentiate fixed and adjustable interest rates. Historically, 70-75% of buyers prefer mortgage loans with fixed rates to adjustable ones, as it’s less risky. However, 25-30% goes for adjustable rates as the interests are lower at the beginning and can be increased or decreased (hopefully) over time, based on the market.
When choosing the loan terms, many people think it’s safer and more comfortable distributing the total amount over longer periods of time. It allows decreasing the amount of monthly payments, so apparently, it’s sensible to stay within your budget. However, if you can afford to pay more without stretching your finances, then shorter-term loans may be better for you as they typically cost less and come with lower interest rates.
Choosing the right type of loan is of utmost importance as each one was developed to fit a specific kind of need. Let’s break down the most common types.
These are the loans we get from the banks or other financial institutions to finance buying a home. They usually come with the lowest APRs in the market but tend to be harder to qualify for. Depending on the amount you are able to pay each month, you can choose the terms that will work for you. Keep in mind that the longer the term, the more interests you will end up paying throughout the life of the loan. The house backs up these loans you acquire, so you risk losing it by missing the payments.
These loans are for financing higher education. You can choose between federal and private student loans. The federal ones are better in terms of lower interests but are again more difficult to be approved.
Another loan, allowing you to make a big purchase. Aside from the traditional financial institutions, you can also take this loan directly from the car dealership. However, make sure you compare the interest rates and choose the most affordable option.
These are short-term loans designed to help people deal with unexpected expenses. They usually offer $100 to $2500 to be paid within a month, although some lenders suggest 3-month payday loans. The downside of these loans is having high-interest rates. On the other side, payday lenders accept poor and bad credit holders, unlike most traditional financial institutions. That’s why people who can’t get approved for other loans at the banks or are just in a hurry make use of this service.
Most often, these are unsecured loans, unlike home equity loans, for example, when you need to back up your loan with an asset, and in case of not meeting the deadlines, you may lose it. There is a wide variety of options for getting a personal loan, as most banks and online lenders suggest.
Among the most common reasons people apply for these loans in the USA are debt consolidation, home renovation, medical bills, wedding expenses, moving costs, etc.
Loans may be of great help when we need extra money to buy a house, start a business, pay for your education, or medical bills. Very often, a small loan can prevent bigger financial problems by filling the gap in your budget. However, there are numerous available options, and thinking twice before starting the process is always a good idea. Compare your choices and make sure it is your best solution and give it a go.