How To Take Out A Loan

No matter how disciplined an individual is with their spending habits and personal finances, there may come a time when they need to borrow some money in the form of a loan. 

In life, there are all kinds of surprises just behind the corner that could cause complete financial devastation without a little bit of help in the form of a loan. There are many factors that need to be considered and weighed before anyone in need of a loan signs anything. Even if money is needed desperately, by rushing into a loan, the situation may end up being much worse than its current state. 

Here are a few things to keep in mind before signing and agreeing to anything.

Different Types of Loans

Before doing anything, the first step is to figure out the exact type of loan that is best for the current situation. A loan is simple in the sense that the borrower applies for a specific amount of money, is approved if they qualify, is given that money, and then repays the money over an agreed upon amount of time. 

However, the details and specifications of various loans can be wildly different from one to the other with dozens of potential financial ramifications. 

Here is a list of the different types of popular loans and what exactly they entail:

Personal Loan

In general when the topic of a loan is brought up, this is the most common and first to come to mind. 

Although there may be restrictions on what the money is spent for, personal loans are generally one of the most versatile loans with funds being used for most anything the borrower wants to put them toward. 

Credit scores are crucial to the details of a personal loan but generally the interest is lower than other loan options and the payment time around the middle.

Typical Amount Range: $1,000 to $100,000

Typical Interest Rate: 6% to 36%

Typical Length: 12 to 60 months

Collateral: None

Auto Loan

An auto loan is a fairly common loan that millions of people will take out every year. This style of loan allows the borrower to pay off a purchased vehicle over time while using it and owning it. 

Details can vary based upon factors such as credit score, condition of the vehicle, and length of loan repayment. This has usually one of the lowest interest rates for a loan with a middling repayment time. However, failure to repay could result in forfeiture of the vehicle.

Typical Amount Range: The cost of the vehicle being purchased

Typical Interest Rate: 3% to 11% new, 4% to 18% used

Typical Length: 24 to 72 months

Collateral: The purchased vehicle 

Mortgage Loan

Purchasing a house is generally one of the most, if not the most, expensive purchase that an individual will make in their lifetime. So of course, a loan is almost always required in order to accomplish this task. 

Similar to an auto loan, a mortgage loan allows the borrower to live in the home before they pay the full price and pay the loan down over the next couple of decades. Similarly, the interest rate will be lower since the payment will take such a long time to balance out and close. 

If payments are not made and the loan is defaulted, the house could be seized in forfeit.

Typical Amount Range: The cost of the home being purchased

Typical Interest Rate: 3% to 6%

Typical Length: 10 to 30 years

Collateral: The purchased home 

Home Equity Loan

This loan is dependent on first having a mortgage and also having some of it paid down. This loan can be just as versatile as a personal loan in that it doesn’t require a purchase like several other options on this list. 

The way it works depends on the amount of equity a borrower has in their home. Equity is the house’s value minus the balance left on the mortgage. So if the home is valued at $250,000 and the mortgage is $100,000 then the equity would be $150,000. 

What makes this loan preferable to a personal loan is the limit can be much higher since the house would be collateral.

Typical Amount Range: The equity of the home

Typical Interest Rate: 4% to 8%

Typical Length: 5 to 30 years

Collateral: The purchased home

Payday Loan

These loans can be quite predatory with their interest rates, but for a short-term need without contracts and months or years to repay it, they can be an option to consider especially for those with bad credit. 

The way it works is a loan is given with the agreement that it will be paid when the borrower receives their next paycheck with interest and fees added in. Again, this option should only be considered in the most dire of times. Especially considering that this type of loan agreement allows a lender to make automatic withdrawals from your bank account if need be. You don’t want to get stuck in a situation where you have to ask how to block payday loans from debiting your account.

Typical Amount Range: Usually $500 or less

Typical Interest Rate: 200% to 500%

Typical Length: 3 to 10 days

Collateral: The upcoming paycheck

Auto Title Loan

Similar to a payday loan but requires an auto title of a vehicle that grants legal ownership of the car. These loans can also be just as predatory as a payday loan but could result in the loss of the vehicle if not paid back. 

Only in the most dire of situations should this be considered since the failure to pay could result in a massive loss.

Typical Amount Range: 25% to 50% of the vehicle’s value

Typical Interest Rate: 10% to 25%

Typical Length: 15 to 30 days

Collateral: The vehicle 

Pawn Shop Loan

This is another loan that should only be considered if all other options have failed. A loan seeker will bring in an item to the pawn shop and exchange it for cash. The pawn shop will agree not to sell it for a period of time, but if the loan is not repaid in the agreed upon time frame, the shop will legally own the item and most likely sell it.

Typical Amount Range: 20% to 60% of the item’s value

Typical Interest Rate: 2% to 25%

Typical Length: A few weeks to a few months

Collateral: The item

Things To Consider When Taking Out A Loan

Once you have selected the type of loan that best fits your specific situation, there are a few more things to consider before taking out a loan, and questions to ask before agreeing to one:

• Know your budget: How much exactly do you need? What is this money for? What is your monthly income, and how much could you pay back each month comfortably? 

The more information you have about your financial situation, the better the repayment process will be and the more comfortable the lender will be in giving the loan, which could help make the approval more likely.

• Credit score: What is your credit score? Is there time to improve it before the loan is needed? 

The higher a credit score, the better the conditions of a loan will be. That’s the case in every single type of loan listed above. If it’s possible to improve the score even a little bit before applying, that should be done in order to increase the chances of approval and make the terms more favorable.

• Compare lenders and their options: What institution are you considering? Is there a different one with more favorable reputation or rates? 

In the world of lending money, there are hundreds of available options and they all want your business. If you can wait and shop around, it’ll generally be better in the long run. Consider things like interest rates and lengths of the loan alongside the terms and conditions.

The Takeaway: Loans can be a financial strain for years, so it’s very important to select not just the best terms and options for a loan, but also the best type for your situation. After that it’s crucial to take time to budget and prepare for repayment.

Now that you’ve found the perfect loan suiting your situation, it’s time to apply and hopefully be accepted. The process will be out of your hands for this step, but if you’ve done your due diligence before applying, you should have a good idea on where you stand with acceptance before you even apply. 

Once the money is yours it’s time to put it where it’s been needed. After the general grace period of a loan the time for repayment will come, but that shouldn’t come as a surprise or an issue since it would have been already planned and budgeted for thanks to our first step!

Almost everyone will need a substantial amount of money, and quickly, at some point in their life for various reasons. Taking out a loan is often the only option to accomplish this goal but it comes with tremendous responsibility that should not be taken lightly. 

Consider first the type of loan best suited and then keep in mind the details and numbers since this loan will most likely be around for years to come.

For help tackling debt so you can save the extra cash to not even need a loan down the road to cover a big expense, click here to get a consult with a debt expert today.