Loan Lister

There are two main types of personal loans, secured and unsecured.  Most personal loans average from one to five years in term.  Some can be as short as 30 days or up to 10 years.  Before you look for a loan, identify your needs and your abilities.

Secured loans, as the name implies, involves putting up collateral to secure the loan.  The type of collateral depends on the loan and the lending institution.  Common secured loans are mobile/manufactured homes, RVs, boats, negotiable security (such as stocks or bonds), and other miscellaneous loans, which often uses your purchase as collateral.  Secured loans offer a lower interest rate in comparison to unsecured loans.

Unsecured loans are a higher risk for the lending institution because, should you default, they would have to undergo a lengthy legal process to try to gain compensation.  The terms of approval on these types of loans are more dependent on your credit report.  There is a greater chance of being denied if your credit has blemishes.

Other personal loans fall within the two above categories.  These include military loans, payday loans, fast cash loans, debt consolidation, line of credit, etc.  These specific loans can be secured or unsecured depending on the terms of agreement.

There are a few major differences between a personal loan and a personal line of credit (LOC).  It is important to know these distinctions if you are in the process of looking for loan options.

1. Fund access – A personal loan comes as a single lump sum payment.  An LOC, however, has a little more flexibility.  Think of an LOC as a credit card disguised as a checking account. Instead of a credit card, you receive checks to access your credit limit.
2. Payment options – Most personal loans require that you pay a fixed monthly payment consisting of both interest and principal.  LOCs are similar to credit cards in their payment calculations.  The amount of principal paid depends on what is drawn.  For example, some LOC principal payments are either $25 or 1/120th the amount of principal, depending on which is greater.
3. Interest rate – Personal loans usually have fixed rates to go along with their fixed monthly payments.  LOC’s, on the other hand, are the opposite.  They often have a variable interest rate, which can affect the monthly payments.

Personal loans are great if you need a lump sum or a loan with a fixed payment, making it is easier to budget and plan around.  If you want more flexibility, the LOC would be more suitable.

A line of credit is a personal loan extended to a person based on their credit score and income.  These types of loans can be secured (collateral) or unsecured.  Like any type of loan, it can come in handy or become a quagmire of debt depending on how it is used.  It should be used either for emergency use only or as a type of investment tool.  People often end up into trouble by forgetting three things:

1. The original plan:  Most people get a loan for a specific purpose.  Once they open the LOC, people tend to forget or alter their original plans.
2. The LOC is a loan: Over time, people can forget the LOC is a loan and not a source of income. They can come to rely on it to pay for their monthly expenses. The more the LOC is used, the higher the monthly payment.  This tends to be a downward spiral, especially in combination with #3.
3. The LOC is limited: It is limited in funds that have to be paid back.  Most people hit bottom.

If you are looking into opening a personal line of credit, think about the consequences, come up with a plan and stick to it.

Sometimes we make life-altering choices spontaneously and sometimes life-altering events make our choices.  No matter your reason for thinking about a personal loan, it can sometimes pay to think things through.  Before obtaining a personal loan, ask yourself these questions.

Why do I need a loan?

Will it improve my life or situation?  How will it improve your quality of life?  Is it for medical treatment or a new toy?  Is what you need (or want) that important?  Sometimes the answer is obvious, and sometimes want overwhelms reason.  Sorting through your feelings will help determine if getting a loan is a wise decision.  This is the perfect time to ask yourself how much money you really need to borrow.

What is my credit status?

Have you been late making a payment or defaulted on a loan?  You might want to obtain a credit report and make sure it is accurate.  Bad credit means a higher risk of denial or a higher interest rate.  The lending institution may either deny your loan altogether or approve a lower amount.  Higher interest rates increase you monthly payments and decrease the amount you can afford.

How much can I afford to borrow?

With interest accruing and life occurring ask yourself how much can you afford to pay per month and still budget for the future and for emergencies.