August 2013

Looking for a Loan? Know the Facts before You Sign

There are all types of loans available to consumers - personal loans from a bank or credit union, payday loans, and title loans just to name a few. If you are in the market for a personal loan, the offer you receive from a creditor will largely depend on your credit history and credit score. Potential lenders weigh your personal financial information when deciding whether to approve or deny your loan application. If you are approved, they also use it to determine the terms and conditions of your loan.

No matter what type of loan you ultimately choose, you should always keep in mind that borrowing money is a very serious responsibility.

Today, it's not always easy to qualify for a personal loan with a low interest rate. But even in this still-recovering economy, people have financial issues to deal with and they still need loans. If this describes your current situation, there are some basic facts which you should know about loans before you make a final decision.

Secured versus Unsecured Loans

Most loans fall into one of two categories: secured and unsecured. If a loan is secured, it means the lender requires some form of collateral from the borrower. Common examples of collateral are a car or a home. If a lender doesn't demand any collateral from the borrower then the loan is considered unsecured. This type of loan poses more risk to the lender (if the borrower defaults) so unsecured loans typically come with higher interest rates and less consumer-friendly terms and conditions.

The advantages of secured loans are:

  • The amount of money you can borrow is normally greater with a secured loan.
  • The repayment period is typically spread out over a longer period of time.
  • The APR (annual percentage rate) is generally lower which means you pay less in interest charges over the life of the loan.
  • Individuals with less-than-perfect credit may be able to obtain a secured loan. Lenders know that with a secured loan they will get their money back even if you default on the loan.

There are disadvantages with secured loans also:

  • The repayment period is usually longer. This means you are in debt for a longer period of time.
  • You have to pledge certain personal assets as collateral for the loan.
  • If you cannot make the regular payments or otherwise default on your loan, the lender has the legal right to seize any property and assets which you have pledged as collateral and sell them to recover the money which you owe.

Here are some advantages of unsecured loans:

  • You don't need to have a lot of assets since no collateral is required.
  • You aren't at risk of losing any personal property such as your home or car.
  • If you only need to borrow a small amount of money, unsecured loans may be a better option.

The disadvantages of unsecured loans are:

  • Since lenders require no collateral, interest rates are usually higher for unsecured loans.
  • Repayment times are usually shorter. This does mean you pay off the debt more quickly but it also means your regular payments are higher.
  • Lenders generally have stricter requirements to qualify for an unsecured loan.

Things to Consider When Shopping for a Loan

No matter what type of loan you choose, there are some important points to consider before signing any contract or agreement.

  1. Be certain you understand the terms and conditions of the loan being offered. Lenders are legally required to fully disclose the terms and conditions of your loan in writing and before they ask you to sign any paperwork. It is your responsibility to read, review, and understand these terms and conditions. Any questions or concerns should be addressed before you sign the loan agreement. If you are not satisfied with the terms as spelled out in your loan contract, you have every right to refuse it. Never sign a loan agreement that contains blank spaces.
  2. Be sure that you can afford to repay the loan. Don't commit to a loan if you are counting on a possible bonus, or increase in salary, or other financial windfall to help you handle the loan payments. You should only consider your current income when deciding if you can afford to borrow money. If you have any doubts about being able to repay the loan according to the terms in your contract, you should not accept the loan.
  3. You should only borrow money for a legitimate "need". Many people confuse "want" with "need". A new flat screen TV is hardly a need. However, a new water heater to replace one that unexpectedly dies might be. Whenever you make the decision to add to your debt, be certain that you truly need to borrow the money. Take the time to carefully go over your financial situation and explore all your options. If you decide that the reason you want to borrow money is a "want", you would probably be better off saving up until you have the actual cash to pay for whatever it is.
  4. Make sure you are dealing with a reputable lending company. Unfortunately there are some unscrupulous lenders doing business out there. You can save yourself a lot of grief and aggravation by checking out any potential lenders with your local Better Business Bureau to see if there are any lawsuits or complaints filed against them. Also contact your specific state's Office of Consumer Affairs. This state government agency compiles information on all types of businesses and can tell you if any lending companies are being investigated for shoddy business practices or other serious complaints.