Do You Need to Borrow? How to Pick the Right Sort of Loan

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Securing a loan is not as difficult as choosing the right sort of loan. You may want to borrow for a number of reasons, such as financing a home, a car or your wedding. Regardless of your objectives behind seeking some financial help, it is imperative to know what sort of loan would be ideal for your needs. 

The availability of multiple loans make choosing one a complicated decision. Let’s take a look at them below and what purpose they’re useful for:

1. Personal Loans

When one compare secured loans to unsecured loans, we believe personal loans come out as the victor. Personal loans are an expensive means or borrowing money but the brighter side of these is that they demand no collateral. This means that if you want to borrow money to fund your wedding, expand your business or pay your bills, you don’t have to risk your house for it. 

Typically, you do not have to put up any collateral for a lender to process your loan and hence, none of your assets are at stake of seizure in case you fail to pay. You can obtain a personal loan for a couple of hundred to a couple of thousand dollars or pounds. The repayment period typically stretches for two to five years. 

To approve of your loan, the lenders will need to see evidence of your income, proof of the worth of your assets and how much amount you wish to borrow. Generally, experts recommend personal loans as the ideal option for those who need a small amount of cash relatively. If you’re sure you can repay a certain low sum within a couple of years, then this loan is a good option for you. 

2. Fixed Rate Loans

These loans have a fixed rate that remain the same over the specified period, which is usually for one to five years. During this period, your repayments will not fluctuate with interest fluctuation and your monthly payment amount remains the same. 

When your term comes to an end, you may lock another interest rate in if you wish, opt for a split loan or even switch to a variable one. Fixed rate loans generally are not as flexible as variable loans and also come with limited features. 

As a matter of fact, in these loans you may not have the facility of making extra payments or will have to pay a fee for early exit. 

3. Credit Cards

Credit cards are equivalent to borrowing a small personal loan, whenever you use it to pay for something you need. You will have to suffer no extra interest rates if you pay the balance in full right away. However, if you fail to pay some part of your debt immediately, then you will have to suffer the extra interest charges every month until you pay it all off. 

4. Interest Only Loans

If you’re looking for investment property loans, then an ideal option is the interest only loan. The reason is that interest only loans are usually entirely tax deductible and can be variable or fixed loans. If you use this loan for significant capital growth, then no doubt you will find this best solution for your cash flow. 

When you opt for this type of loan, you repayments cover the interest component of it. As a result, you get to maintain your repayments a t a minimum on the investment property. For most investors, the tax deductible feature of the investment loan is the greatest attraction. 

5. Home Equity Loan

If you’re a homeowner, you can borrow against the equity you have built up in your property. In this loan option, you can actually borrow as much of the amount as you own. If you have paid off half your home’s mortgage, then you can borrow the amount equivalent to half of the value of your house. 

In simple terms, the home equity loan is essentially the contrast between the current market value of your property and the rate you still owe on your mortgage. 

6. Standard Variable Rate Loan

This is the most common and popular sort of loan because of its greater flexibility and more features available. Because of these characteristics, the standard variable loan usually has a slight higher rate but the extra features make it worthwhile. 

For instance, you may find the option of splitting between a variable or fixed, redraw facility, portability and extra repayments quite beneficial. However, you need to also consider the facts that repayments in this loan type vary when the interest rate fluctuates before you decide to proceed. 

7. HELOC

HELOC means the home equity lines of credit. It typically resembles a credit card with the only difference being setting your home up as collateral. In this case, the lender gives you the maximum amount of credit and you can use, repay and reuse it for as long as your account remains active. In most cases, such an account remains opened for ten to twenty years. 

The interest can be tax deductible as it is in the regular home equity loans. The only exception here is that while in the case of the regular equity loan you can fix the interest rate at the time of approval, in the case of HELOCs, one cannot set the rate at the time of approval. 

The borrowers can access the money at any time over a stretch of years so the interest rate has to remain a variable. Many lenders peg it to an underlying index in this case. 

Final Thoughts

When it comes to borrowing to meet your financial needs, you can pick from a several types of loans. Each come with different features, repayment period and other characteristics. When choosing the best one to suit your needs, you must consider the monthly payments and take note of the amount you will have to pay each month. 

There are several loans that offer a lower monthly payment with balloon payments or variable interest rates, but you must not allow these to blind you to other factors. It is important to reevaluate what you can afford and how far it is safe for you to stretch financially. 

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.