If you are thinking of taking on extra debt, you need to be aware of how loans differ. What purposes they serve, and how they tailor themselves to different requirements. We took a look at what is involved.
There is one simple, but big difference between the two main types of loans. Secured loans will offer, on average, better rates of interest. There is a catch though, and that is that you must offer an asset as collateral should you struggle to make repayments. This is why you get better rates, because the lender has an insurance in your asset. With unsecured loans, none of your assets are at risk, but as a result you will get less competitive rates. And a failure to make repayments will have an averse effect on your credit rating.
A key part of any credit arrangement is of course the amount you will have to pay off on top of the original loan total. Interest rates vary wildly. The longer the repayment period, the less the rate tends to be. But another important factor is how good your credit score. The better it is, the better rates creditors are likely to offer you, as they trust you more.
Choosing the right repayment period is a balancing act that needs you to think about your situation and what is best. The longer the repayment period, the longer the debt hangs over you. You may get better rates, but you are still likely to pay more interest in total as the interest is spread out over a longer period.
The amount you borrow may well define how lenders categorize your loan, and perhaps what they decide they will lend you. As always, only borrow what you need to, and not a penny more. Ensure that you have explored other avenues of sourcing the funds required. Think about how you incorporate the repayments into your monthly budget, then proceed accordingly.
If you have been on the market for loans in the past, or are currently looking, you may have noticed that some loans are targeted towards very specific needs. Perhaps marketed as a car loan or a wedding loan. This is deceptive in a way, because these loans do not have to be used for those specific purposes. At the end of the day, a loan is a loan. If it is the right product for you, and does not lead to further debt problems, then go for it, whatever the purpose. Just do not use loans for treats or unimportant purposes.