Tips for choosing the best loan option

You may find various types of loans in the market like credit card advances, unsecured loans, secured loans, payday loans, home equity loans, cosigned loans, etc. Each type of loan has its pros and cons. Let us understand which factors make a loan the best loan option for you and which loans should be avoided.

When is Secured loan a best loan option for you?

Secured loans should be your first priority when you have collateral to offer. These loans are usually given at lower interest rates because the given collateral reduces the risk of the lender.

You can even use your home as a security. Such loans are called home equity loans. You are eligible to take these loans even if the property is mortgaged. But remember you can take a loan only on the equity part of the property (which means only the part for which you have repaid the mortgage). Also, the loan amount that can be sanctioned is not more than 80% of the equity part of the property.

When to take unsecured loans?

Unsecured loans should be your second priority after secured loans because they are offered at higher interest rates. But if do not have collateral to offer to the lender then you are left with no choice. You can consider taking unsecured loans to clear your interest-rate loans like credit card debts, and payday loans. etc.

When it comes to unsecured loans, lenders go through your credit score very seriously. You may be denied a loan if your credit score is bad or the loan may be given at a very high interest rate. So, make sure you have a decent credit score before applying for unsecured loans.

Why secured loans should be preferred over unsecured?

It highly depends on your needs. A secured loan can enable you to take a higher amount of loan at better interest rates. Thus, it is always good to go for secured loans if you have collateral to offer like real estate, a vehicle, or an investment portfolio of bonds and shares.

But if you do not have such collateral to offer, then you have to go with the unsecured loans. The interest rate will be higher. But you can still get an unsecured personal loan at a good APR (annual percentage rate) if you have a good credit score.

When to take a variable interest rate loan?

Variable rate secured loans should be preferred as historical data suggests that they are less expensive but it’s not certain. If you expect your income to grow in the future, then you can easily afford the risk of higher interest rates associated with such loans.

When fixed interest loans are best for you?

If you are in doubt about your income growth and cannot afford the possibility of higher interest rates, you should go with fixed-rate loans.

When to consider taking cosigned loans?

The bank will not sanction you a loan if you extremely poor credit score and even if they do it will be at very high interest rates. In such cases, you look for a friend or a family member with a credit score higher than 670 to help you out and it can also lower your interest rate significantly.

When to take debt consolidation loans?

Taking debt consolidation loans can be good for you in three scenarios:

when you have improved your credit score in the last few years. Then you can take debt consolidation loans at better APR (annual percentage rate) to offset your previous personal loans which you have taken at higher interest rates.
When you have taken a fixed-interest personal loan previously and witness a decline in the overall interest rate in the market.
When you have taken too many small personal loans, then debt consolidation loans can help you manage your debts more efficiently.

Which types of loans should be avoided?

Avoid taking payday loans and cash advance loans. Such loans are even illegal in various states of the U.S.A. These loans are given at very high-interest rates for very short periods of time. You may even come into more trouble because of extremely high-interest rates. If you can repay payday loans on time you may be forced to renew them with penalties and even higher interest rates. This can create a never-ending debt trap for you.

KNOW RULES RELATED TO CONSUMER PROTECTION IF YOU HAVE FALLEN PREY TO THESE TYPES OF LOANS

But what to do if you do not have a good credit score or collateral?

You can approach community credit unions, which may help you out by giving small loans at affordable interest rates.
You can ask your employers for salary advances.
You can ask for help from your friends and family members.

Learn to manage expenses to crush your debts.