Understanding Loan Types
Unless you happen to be independently wealthy, the chances are high that you will require additional liquidity from time to time. Whether referring to a new vehicle, obtaining a mortgage for your home or paying for an education, loans are some of the most common tools to employ. Secured loans offer a number of advantages and if you are considering an application in the near future, it is a good idea to take a closer look at their basic mechanics. We will then delve into the different types so that you can fully appreciate the options at your disposal.
What are Secured Loans?
It is first a good idea to differentiate between secured and unsecured loans. Unsecured loans are often used when you do not have any collateral (the means by which a lender can collect the loan if you fail to make payments or default). As a result, their interest rates ten to be much higher and you are (normally) not able to apply for very large amounts at a given time. Unsecured loans are also used by those with less than perfect credit.
On the contrary, secured loans are backed up by a tangible asset. This is called collateral and such assets are essentially a guarantee that the bank or building society can collect on any debts that might be owed in the future. As you might have imagined, secured loans can be obtained for very large amounts and their associated interest rates (both fixed and variable) are much lower. This is important, as high interest rates signify that you will be required to pay a greater balance back when the loan finally matures.
Secured loans may or may not require a co-signer; this depends upon your credit history as well as if the asset is in more than one name (such as you and your spouse or significant other). This is a further means to guarantee that the principle will be paid back i a timely manner. Now that we have taken a quick look at the main principles surrounding secured loans, let's closely examine a handful of the most common variants.
Small business loans are quite common if you wish to obtain the financial liquidity required to start a new venture. These loans can be used to purchase a property, to secure new equipment or to enact an initial advertising campaign. The ultimate goal is to utilise such liquidity to ensure a high rate of return (sometimes known as a return on investment or ROI). Business loans are also important if you happen to be working with a group of investors, as they will be provided with a greater level of confidence that you will not fall short of your target margins. The good news about small business loans is that they tend to be associated with low interest rates and rather amenable repayment periods. However, always be sure to never request more than is absolutely necessary.
Car loans can range from a few hundred pounds to well into the thousands or even the tens of thousands. As you might have already guessed, the main purpose behind a secured car loan is to enable you to purchase a vehicle (both new and used models). This type of loan will often be employed in order to satisfy the initial down payment required by the dealer; a critical step. The principle with a secured car loan is straightforward. Assuming that you have been approved for the required amount, you can utilise these funds as a lump sum. You are thereafter required to make regular payments (principle including interest).
Home Loans and Mortgages
Home loans are often referred to as mortgages or mortgage loans. This type of secured investment will be used in order to obtain ownership of a property. However, one interesting feature of this type of loan should be pointed out. The collateral in question is the home itself. In other words, those who happen to default on a home loan could actually be at risk of losing their property.
Mortgages are long-term ventures; normally categorised by how many years will be required before the initial amount is paid in full. Mortgages can range from five or ten years to 20 or 30 years. As you might have guessed, this often depends upon the amount requested as well as your monthly payment options. In the event that you happen to fulfil your obligations ahead of time, it may be possible to take out an additional mortgage. Such funds can then be used for other purposes such as vehicles or an education.
Loans for Bad Credit
Have you been struggling with past credit ratings? If so, a loan for bad credit could be an excellent option. However, a logical question arises. Why on earth would an individual request an additional loan if they are already burdened with debt and missed payments? The answer to this question is simple. Loans for bad credit are NOT generally meant to purchase luxury goods such as a new vehicle or a holiday abroad. They are instead designed as a means to re-establish a better line of credit through timely repayments of the initial principle and any associated interest. As many individuals who apply for this type of loan are at a higher risk of defaulting, the associated interest rates are generally higher then when compared to a standard secured loan. Once again, keep in mind that a secured loan for bad credit will require some type of asset to be used as collateral.
Loans for no Credit
We should also look at secured loans in the event that you have no credit to speak of. Perhaps you have just graduated university and you hope to enjoy extra liquidity to pay for a flat. You might have instead decided to file for bankruptcy (there are certain cases when your credit history will need to be created once again from scratch). These two scenarios could be ameliorated by a secured loan for no credit. While the amounts able to be obtained a generally lower when compared to the other options mentioned above, these loans are excellent ways to establish a solid credit score. You can therefore apply for larger amounts in the future due to the fact that lending institutions will not view your financial position as a massive risk.
It is an unfortunate fact that attending university has become quite an expensive prospect in this day and age. While there are numerous government grants and scholarships which can be obtained, it could still be very difficult to make ends meet. Hence, we can begin to understand the purpose of student loans. As these are once again secured loans, the chances are high that a student will need to co-signer in order to obtain the requested amount. This is normally a parent or an older family member who already possesses a well-established line of credit. Although the interest rates associated with student loans can sometimes be high, they are often provided with an initial grace period before the balance begins to be repaid. This grace period will generally last between six months and one year immediately after graduation.
What to Take into Account When Applying for a Secured Loan
The most important suggestion is to only request what you require and nothing more. Do not be tempted to take out a massive loan, as this will be much more difficult to repay; placing your credit in jeopardy. By their very definition, consider what type of security (asset) you are willing to offer as collateral. Its value will partially signify how much money the lending institution is willing to provide. It could also be wise to obtain a co-signer; particularly if you have any concerns about the repayment period or similar terms and conditions.
Obtaining a secured loan can provide you with the liquidity to make critical life decisions. After all, very few of us possess the cash to simply buy a new vehicle or to purchase a home. It is clear to see the benefits of a secured loan and by making informed decisions, you will be able to reap all of their associated rewards while maintaining a positive credit outlook.