Using consumer loans to help your finances can be an excellent strategy. That is if you play your cards right. We often hear stories of people who can’t manage their loans successfully, debts that cannot be paid off, interest rates that are too high – the list goes on.
These unwelcome scenarios can easily discourage people to the point where they avoid dealing with loans altogether. But it’s only because they haven’t done the necessary research.
Contrary to what you might think, you don’t need financial advisors to help you decide on your consumer loan, though it can certainly help. In reality, you should get acquainted with the nuts and bolts of consumer banking before making a move.
But providers are a dime a dozen, each with their own rules and regulations. Where do you start? Just like buying a fresh pair of shoes, you don’t just grab the first one you find. Sure, it’s possible to hit a home run the first time, but comparing different products usually yields the best results.
And in the world of consumer loans, you’d use precisely the same approach. It’s a little trickier than shoe shopping, that’s true, but nothing worth losing sleep over. This article will hopefully provide valuable insight in this matter so you can feel more secure when applying for a loan.
The concept of loans has been around forever. It highlights the very best in our human nature: to help those in (often desperate) need. But lending means paying back, and that’s where many people fail to oblige. The result, of course, is mistrust and general aversion towards lending. Banks, as we know, have devised clever ways of securing paybacks without fail, usually through secured loans.
In other words, they will use the borrower’s assets as collateral. For instance, you’ve decided to take a secured loan at $100,000 from your local bank. With this type of loan, the bank will use some of your belongings, e.g. your house, car, jewelry, art, savings, etc. as a condition for borrowing. The asset used will depend on the loan itself. If you were to purchase a home, you would take out a mortgage. A car loan? Then your vehicle becomes the collateral.
Not all loans are secured, though. The bank (or any other lending authority) can lend a certain amount without demanding a collateral. This is also known as an unsecured loan, of which the most common type is the consumer loan. Now, considering what we said before about different bank protocols, you should do little research to see what suits your finances best.
A Few Essentials
You can understand the unique offer of a consumer loan without too much analysis. It does not involve the same restrictions as other loans, so it provides certain freedom. There are no guidelines set beforehand, except for repayment details.
Generally speaking, knowing that your personal assets are not jeopardized is a huge relief. No one wants bank officials knocking on your door at 8 AM to inform you that your brand-new Volvo has been seized.
When dealing with banks, people want clear regulations and as little drama as possible. The ideal bank-consumer relationship involves an agreement for repaying specified amount of money, end of story. One that does not involve any property. For this reason, people think of consumer loans as the ideal form of lending money.
But there’s more to the story. Finance is a sensitive discipline, and banks need to cover every aspect that might be problematic. In the case of consumer loans, this means higher interest rates. Before rolling your eyes with an I knew it attitude, think from the bank’s point of view.
Without any collateral involved, banks need another kind of security to compensate. Loans like this are usually more expensive, with rates at 10% or higher. Interest rates for personal rates vary between 4% and 36%, so our rate is still pretty low in the big picture. Also, they allow you to choose the repayment period, usually between one and five years. According to logic, the sooner you repay the loan, the more money you will save. That’s exactly how it plays out in reality. As everyone wants to decrease total costs, it’s always better to fulfill all obligations in due time and avoid penalties.
Compare to Find the Best Deal
Making a decision in a sea of loan offers can be nerve-racking. It requires patience, time and a lot of effort. Also, you have to be aware of your own financial circumstances. When it comes to the actual loan, it’s necessary to look at both nominal and effective interest rates.
A nominal rate tells you the percentage of what you pay each month, based on a bank’s lending risk. On the other hand, effective rates reveal the exact amount you pay, plus all other extra charges and fees.
When you sammenlign different loans, these two should be top priorities. If a particular rate seems unjustifiably high, it’s probably because it is. Measuring it against a few other offers will give you a more realistic idea of what is happening.
There are a few valuable tips applicable in almost all situations with loans. Some lenders insist on making hard credit inquiry when you borrow money. It involves checking your banking history, transactions, whether you’ve complied with the rules, etc. Other creditors allow you to compare without all that fuss, so it’s good to check their policy beforehand.
Also, you should compare quotes from at least three authorities, even more if possible. The more you have to work with, the better understanding you’ll have. This one’s fairly obvious, but you should never neglect the fine print: you never know if a tricky regulation is waiting behind the corner.
Finally, considering the closing costs will help eliminate nasty surprises along the way. Banks charge you for processing the loan, usually between 1% and 6% of the entire amount. The provider should give honest and transparent information regarding these costs, otherwise you’re likely dealing with shady organizations.
Dealing with loans can sound like a nightmare. But given the right mindset, you can turn it into an enjoyable experience. All banks handle loans a bit differently, although the basic principles are the same. Even if you don’t use professional financial advice, a little research online can get you a long way.
Also, you should never underestimate the art of negotiation. In the case of outstanding loans, for example, the lender might allow you to haggle for a lower interest rate. Once you calculate it, you’ll find you can save a substantial amount.
We all know the eternal legacy Shakespeare left to the world. But in one of his masterpieces, King Lear, Polonius says: Neither a lender nor a borrower be. It should be a piece of sound life advice, but if everyone took it, the world would be a much harsher place.