subject: Playing The Personal Loan Game [print this page] How much money do you need? What is the interest offered by the lender? How much time do you have to repay the loan? Do you have possessions that can be used as collateral against the loan?
What are the advantages and disadvantages of each loan type based on your circumstances? A secured loan is given regardless of your credit history because of the collateral you offer in return to guarantee the loan.
Most homeowners usually qualify for a secure loan, but other valuables can be used as collateral such as a car, land or buildings. The lender is less adverse to lending you the money knowing that he can take possession of the collateral you have offered in order to guarantee the loan if you default on the loan.
It is a serious disadvantage if you lose your home or car, but only if you are 100% confident with your ability to repaying the loan then this should not pose a threat.
The advantages of a secure loan are better interest rates, lower monthly payments and a longer repayment period thanks to the collateral. An unsecured loan does not require you to put your home or car on the line.
It is often used by people who rent and do not own a home or have any significant collateral. Unsecured loans generally do require good credit history. An advantage is that it is processed more rapidly than a secured loan since all that is need is your credit report and your lender's application.
But the disadvantages are higher interest rates and monthly payments as well as shorter payment terms. Plus, the loan amounts of an unsecured loan are usually smaller than those for a secured loan.
A line of credit is a lot like a credit card; you have a limit that you can borrow up to at any given time as long as it is within that limit. The limit is determined by how much collateral you are willing to put up and how much you are asking for.
You also have a monthly payment and a deadline for repaying, but as you pay down the loan you then automatically qualify to reuse it again up to the predetermined limit.
An advantage is that you can request a higher credit limit if you make regular payments and follow the agreed upon terms. But as with credit cards you can easily fall into very bad spending habits.
Be careful if you have a tendency to overspend, this may not be the loan for you. Unsecured personal loans customarily come in two main types: the installment plan and the line of credit.
Often, the lending institution will offer the borrower the choice between these two alternatives for repayment of the personal loan. Here are a few things to think about before and during that choosing process.
When will your repayment occur? This question is key to all aspects of the personal loan process but especially when choosing between an installment repayment option and a line of credit.
If the borrower is not exactly sure when the full balance will be paid back, a revolving line of credit can provide flexibility and then be paid back in full at a set date.
However, the total interest paid on the loan is often higher than for a loan with a fixed payment schedule, i.e., an installment plan. An installment plan is desirable if the borrower has a steady source of income but needs a lump sum loan right now for a specific purpose.
For instance, to pay college tuition expense. Installment plan repayment is great for someone who has a regular paycheck and can spare some money week to week.
A personal loan used to repay back taxes is a good option for an installment plan. A line of credit can work well for waiting out a bout of unemployment.
