We can’t always be financially stable; this is especially true in times of emergencies. Some persons may be lucky enough to have enough funds in their savings account to cater for some emergencies. However, not everyone is that lucky.
So, when an emergency occurs and you need extra cash, the idea of a consumer loan is sure to pop up. Sometimes, it may not even be an emergency; it could simply be that you need extra cash to do something you want at the moment.
Despite what the case may be, you have to properly evaluate the situation before you borrow money. Certain factors must be considered so that you do not end up shooting your foot in the long run.
Hence, in this read, we will be discussing some of the important things that you must consider before you get a consumer loan. But before we go into all that, let us quickly discuss what consumer loan is to make for better understanding.
What are consumer loans?
Consumer loans refer to a type of loan that is offered to people to help them finance a particular expenditure. It is often given by the creditor and can either be secured or unsecured. This is not to be confused with business loans that are specifically given to fund a business.
Secured versus unsecured
When the loan is covered by collateral it is known as a secured one. Collateral is an asset that the borrower offers for the credit in case they end up defaulting the terms of the credit.
These often come with more perks like a bigger amount of funds, lower interest rates, and a longer time for repayment. These perks are given because the credit is covered by the collateral; hence, the creditor’s risk is significantly reduced.
If the borrower is unable to pay back the credit for any reason, the creditor will take the collateral as theirs and liquidate it to get the outstanding credit.
Unsecured credits are not covered by any asset. Hence, the amount borrowed is often limited and would have to be paid back in a short period. Also, the interest rate may be much higher.
All these are because the lender’s risk is significantly increased if the borrower doesn’t pay back. They may have no means of recovering the funds in this case.
There are several types of consumer loans. Below are some of the most common ones:
- Personal: This is not collected for any stated reason and can be used by the borrower for any personal reason.
- Student: This is used for educational financing.
- Auto: The funds gotten will have to be used to buy a vehicle.
- Credit Cards: The cards will be loaded with funds that the consumer can use to make daily purchases.
- Mortgages: The funds gotten will have to be used to buy a house.
What to think of before you apply for the loan
The following are some of the most important things you have to consider before you apply for a loan:
1. Why do you need it?
The reason you are taking out credit is very important. Sometimes, when you give proper thought to the reason you want the loan, you may realize it may not be worth all the consequences.
If the reason is very important, maybe you need the money to sort out a medical bill, to pay for your wedding, or to pay off accumulated bills, and then you have to be sure of the amount needed.
Properly think it through and know how much you need and how much you can borrow. Also, think of other means you can come up with the money before you decide on borrowing it.
2. Interest rates
Loans typically have to be repaid with interest on them. However, the rate of the interest being paid back often depends on several things, one of which is who is giving the money to you.
Bear in mind that banks, unions, and financial institutions do not offer the same terms. Therefore, you need to consider all your options and ensure the one you opt for has an interest rate that won’t cause regrets in the end.
3. Hidden charges
Understanding the terms of the credit you wish to take is very important. If you don’t do this, you may end up being getting confronted with several hidden fees that you didn’t even know of when you took the loan.
Therefore, you should be on the lookout for fees like an appraisal, origination, underwriting, administration, processing, and credit report. The fees would typically not be included in the interest rate. However, they will be included in the monthly payment you have to make. Hence, they will ultimately increase what you have to pay monthly.
Therefore, you have to be aware of these charges from the get-go so that you can consider them alongside your interest rate. Sometimes, opting for a loan with an interest rate that is higher or going for another financial institution may be a better choice.
4. How do you intend to make repayment?
You need to have a properly detailed and calculated financial plan when you apply for credit so that you don’t cause further financial problems for yourself.
Making a plan that will enable you to pay back the borrowed money is important. Put your salary into consideration: Will it cater to the loan while also taking care of your other expenses? If it won’t, how do you intend to make the payment? What other means do you have to earn money and pay back the borrowed money?
Considering all these are important because if the loan isn’t paid at the time it should be, you would have to pay an additional penalty fee. This may have a significant impact on your finances.
5. The criteria for the loan
If borrowing is the only way you can think of to get out of your financial troubles, then the next thing on your mind should be the criteria you have to meet.
Before you are given credit, certain criteria have to be met and this may very well differ from one provider to the other. Some of the common requirements that have to be met include age, repayment validation, and minimum salary.
But, as we said, this would differ from one provider to the other, hence, no matter your situation; you will surely find a provider whose bill you would fit. Visit https://www.billigeforbrukslån.no/ to learn more about the criteria for consumer loans. You may simply need to search more; this is especially true if your credit score isn’t so appealing.
6. Variable or fixed rate?
Another thing to consider is whether the rate is variable or fixed. Fully understanding the two rates will help you decide which of them would be a better fit for you.
Most unsecured loans typically have fixed rates; however, there are some with variable rates. Variable rates will ultimately increase the repayment amounts.
Hence, ensure you take your time to properly consider your options. Ensure you are aware of what exactly you are getting into so you would not get confronted by surprises down the road. Ensure that if you take a loan with a variable rate you will be capable of handling any surge that will come with it.
Finally, always find out and consider the duration of any loan you take. This way, you can properly calculate the loan’s total cost and the percentage rate per annum. Remember, that the interest rate of short-term credits is often higher.
Therefore, make your calculations properly so you are sure that you won’t have any difficulty settling your payments monthly.
In this article, we have discussed some of the most important things you need to consider before you apply for or take a consumer loan. We hope this read has been helpful to you.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.