August 19, 2015

Loans

Maximizing Personal Credit Through Consumer Loans

The average American currently owes approximately $52,000 in debt. While that may sound high, consider the fact that all credit cards, loans and mortgages are included in the total.  Between young adulthood and retirement, borrowing money for things like college, cars, and houses can span 50 plus years.  While the things we finance may change over time, the need to get great personal loans at low interest rates remains the same.

Personal Loans For Consumer Use

Personal loans make up the majority of all loans created for consumers in the United States.  Most of us apply for personal loans to make major purchases such as homes or autos, or to consolidate debt into one affordable monthly payment.  Loan terms can range from just a few short months to 30 or 40 years, depending on the specific type of personal loan we get. 

The purpose of personal loans is to finance money needed for “personal” use, as opposed to small business loans for example, used to support the start-up of a business by an individual or partnership, www.sba.gov/

Lenders base interest rates in part, on the amount of risk involved with lending money, and the likelihood of receiving that money back in the specified loan term.  Rates for a 30-year fixed mortgage may be as low as three percent, while a credit card provider could charge as much as 30 percent, if the borrower has a poor credit rating.

Secured VS. Unsecured Loans—What’s the difference?

Lenders make many types of personal loans for a variety of reasons.  Most fall into the general category of either secured or unsecured loans.  A secured loan is made on purchases or property that essentially “secures or backs” the loan, ensuring the lender will not lose their investment if the borrower defaults on payment.  Banks, credit unions, mortgage lenders and finance companies all make secured loans that hold the financed property as collateral to be repossessed if the money is not returned.  The lender then in turn, sells the asset and applies the proceeds toward the unpaid balance of the loan. 

Since secured loans are not as risky to lenders, interest rates are typically much lower than unsecured loans.  Examples of secured loans include mortgages, auto loans, boat loans and home equity loans.  Each of these loans grants the lender a legal interest in real property (homes and land) or tangible personal property (moveable property that can be touched).  Debt consolidation loans that are attached to a home’s equity, as well as home equity lines of credit, are also considered secured loans.

Unsecured personal loans are much riskier for lenders to make since they don’t guarantee the bank or credit provider will recoup any of its losses if the borrower defaults.  Because of this, interest rates are generally much higher.  Unsecured installment loans used to purchase items such as furniture or appliances are paid on a monthly installment plan over an agreed upon period of time.  Student loans, while a special type of long-term loan, are also unsecured since there are no assets to offset any debt that goes unpaid. 

Major credit cards and retail store cards are essentially unsecured lines of credit as well.  These can be used to purchase merchandise or services from stores, restaurants, businesses, and online merchants.  In general, they are fairly easy to get, but charge the highest interest rates of unsecured loan products.

Debt Consolidation Loans—Who Needs Them?

Many people consider applying for a secured debt consolidation loan when they are carrying more than one high interest, high payment loan.  By using their home’s equity and combining the balances of two or more of these existing loans or credit card accounts, consumers can often get a lower interest rate, and lower monthly payment as well.  Sometimes, even with bad credit, the interest rate on debt consolidation loans is lower than that of existing accounts.

Debt consolidation loans can also be unsecured loans, when there is no asset or collateral to back the loan. The biggest advantage to using your home’s equity to borrow against for loan consolidation however is the income tax write-off most home equity loans allow at the end of the tax year.  Once debt is combined and monthly payments are lower, consumers can begin to save money and get a handle on their finances.

Bad Credit Loans—A Short-term Solution

A loan is considered a bad-credit loan if it is made to a person with less than favorable credit scores who could not otherwise qualify for a conventional loan.  Unsecured loans such as, “payday loans” or “cash loans” are there to provide consumers with immediate cash when needed.  They are also meant to be paid back usually within a two-week period when the borrower receives their paycheck.

These types of loans always carry very high interest rates and fees since there is no guarantee the lender will be paid in a timely manner.  Bad-credit loans may appeal to some borrowers however, simply because a credit check is often not required for loan approval. When a positive credit score is not needed to qualify for a loan, a consumer who can prove current employment, or other income can generally borrow money from a bad-credit lender for a short period of time.

Improve Credit Scores, Get The Best Loan Rates

While finding a way to borrow money with poor credit scores may seem like a good short-term solution, it does nothing to build a better credit rating and break the cycle of paying high interest rates in the long run.  By choosing to repair damaged credit and improve credit scores using proven credit repair techniques, consumers begin to build healthy credit relationships to get the best rates available on loans and credit cards they deserve.

Because the vast majority of us rely on credit products throughout our lives for a variety of expenditures, it’s important as consumers to understand the different types of loans available and what each has to offer.  BestCredit.net helps you find and compare the best loan products and terms in the consumer-lending market place, so that you can borrow with confidence for the things in life that matter.

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