Before taking out a loan, it’s crucial to understand the specifics of the loan option. For first-timers, the decision-making process could be pretty critical. It would be easier if the borrower was already familiar with the loan types, the terms used, and the conditions the lenders propose.
Challenging financial situations can compel an individual to borrow money from a bank, a finance firm, or online lenders’ offers, like Credit Ninja’s debt options. Borrowing money is not only about repaying the amount borrowed. It’s important to pick a suitable loan type. Also, there’s a need to assess one’s capacity of paying back.
Things You Need to Know as a First-Time Borrower
Not all types of loans are the same. Borrowers can get the best deal if they know what loan product will suit their financial needs.
For beginners, try to shop around for loan options with favorable terms and the lowest interest rates. For now, here are the best loan options that first-time borrowers can choose from.
Personal Loans
This type of loan is probably the most generic loan category in the market. Generally, the repayment term is between 24 and 84 months. Personal loans are desirable because they can be used for various purposes, except for college tuition and unlawful pursuits.
It could be spent on family vacations, home renovations, wedding occasions, or relocation to a new home. Also, personal loans could be used for emergencies, medical treatment, and even debt consolidation. It can even be used to purchase an expensive gadget.
There are two classifications of personal loans— secured and unsecured. If you choose a secured loan, expect to offer some form of collateral such as property, vehicle, or savings account. The lender can seize the collateral if you fail to return the amount entrusted.
On the other hand, unsecured loans aren’t backed by collateral. Compared to secured loans, unsecured loans require better credit. At the same time, it’s more expensive because the lender assumes more risk with this loan type.
A borrower can qualify for a personal loan as long as he can repay it within a specified term. Borrowers can consider getting a personal loan if they need to borrow funds for a reasonably short period.
Personal loans are undeniably expensive, so it’s better to have a well-defined time frame for repayment.
Small Business Loans
Starting or expanding a business is a bold venture. One must have enough capital to carry out such ambitions, and the best way to obtain it is through a small business loan.
The borrowed funds can be spent on various essentials like staffing, renovations, real estate purchases, equipment or tech purchases, and business acquisitions.
Financial institutions like banks offer a wide selection of small business loans. However, you’ll need a bank account for verification. The good thing is, banks don’t actually check your credit when you open an account.
Getting a business loan isn’t as easy as landing personal loans. This is because business loans require more risk on the lender’s side. As a result, they impose strict eligibility requirements.
Payday Loans
A payday loan is a kind of cash advance meant to help borrowers survive until their next paycheck. Borrowers will visit physical locations of finance companies to apply for a payday loan. The essential requirement of a payday loan is the latest pay stubs to prove that a borrower is generating income out of employment. The lender may treat the income as collateral, giving them the benefit of collecting the wages if a borrower fails to settle their debt.
Payday loans have fewer requirements than more traditional loans and follow a simple application process, so many are drawn to this.
Auto Loans
A car purchase is an ambitious investment one can accomplish. To cover the costs, getting an auto loan is the primary option.
There are a few distinct types of auto loans. Borrowers must first assess their financial situation to pick a suitable auto loan type for them.
The generic types of auto loans are the secured and unsecured auto loans. A secured loan demands the borrowers to declare collateral, such as the car they will be purchasing until the loan is fully paid.
If the credit isn’t returned at the expiration of the loan term, the lender has the right to repossess the collateral even without notice. Secured loans have high borrowing limits, lower interest rates, and extended repayment options. It’s less risky to the lender, so it’s pretty simple to avail of this type of loan.
On the flip side, an unsecured auto loan needs no collateral. A borrower’s creditworthiness is the ultimate basis of the loan approval. If no payments are made, the debt would be sold to a debt collection agency. There’s too much risk on the side of the lender, which explains why unsecured loans are more expensive than secured ones.
In Conclusion
Don’t get too excited about a loan. Always evaluate your financial capability first and see if you can pay a specific loan amount in monthly installments. A credit adviser can help if you’re still undecided about what you’re going to do as a first-time borrower.
