The financial sector has made it possible to borrow money to make any purchase. With a great credit score and application, consumers can now afford to purchase homes, cars, boats, and whole office buildings. You can finance a start-up, renovations to a home, and an education. In fact, today’s consumers are more educated, partly because higher education, which was once only accessible by the very wealthy, has been made accessible to everyone.
Today’s loan process has been streamlined to the point that applicants only need to apply for a loan online and within one day they are approved. With the number of variations on the modern loan, though, consumers are faced with an array of choices. Knowing what type of loan best suits your needs is the first step to saving money while financing a project.
Let’s take a closer look at the various loan types and the ones that are best suited for your needs.
Secured Versus Unsecured
Among the various types of loans, most will fall into two categories—secured and unsecured. A secured loan is one that requires collateral and the unsecured one requires none. The secured loan is typically for consumers with no credit rating or a poor credit rating, and it is to guarantee if the loan is not paid back, the financing company can get the money back through the value of the item offered for security. Cars, homes, savings, and other valuables can all be used as collateral when opening a secured loan.
An unsecured loan does not require the applicant have collateral, but the person has to have a good credit score, an employment history, and a low debt-to-income ratio, which essentially means there has to be enough income to cover the loan. This requisite ratio varies depending on the loan. For example, car loans usually require 35 per cent of your income be available to pay for the loan. Those with a proven track record with financing and paying back debts are usually candidates for this type of loan.
Fixed Versus Variable Loans
Within the unsecured loans, you will find two types based on the interest rate. Typically, most loans are fixed, which mean the interest rated does not change. The advantage to this is that the payment amount does not fluctuate, regardless of what is going with market interest changes. For instance, credit cards and car loans usually have a fixed rate that does not change.
Variable rate loans, however, do fluctuate with the market interest changes. Essentially, a variable interest rate changes, and what this means for your payment is that it is not consistent. A great example of the way this works is with mortgages. A home buyer who purchases a home with a mortgage that charges a variable interest rate will see the payment change from month to month
The advantage of the variable rate is when the rates are extremely low your mortgage payment is low. Conversely, though, when the rates increase, homeowners with a variable interest loan risk a payment that balloons. Most choose the fixed interest rate, but those who chose a variable interest loan typically plan to pay off the loan quickly.
A Loan To Fit Your Budget
Most loans fit into at least two of the above categories, whether you are financing a car, a boat, or a home. In addition to these four factors, applicants can find financing any project requires them to seriously review the purpose of the loan and how it fits into their lifestyle. Today’s consumers are fortunate enough that loan programs can cater to your needs and can accommodate most budgets.