So, you recently managed to acquire your dream house in your dream city. Everything is set apart from one tiny problem; you are short of moving funds.
It could also be that you wish to jump into that home remodeling project that you have been putting on hold for years. Or you want to finance a business idea, purchase new business equipment, or buy a car. But you lack the finances to actualize your ideas. Bank loans come in to save the day.
Whichever the reason for getting a loan, it will help if you understand the different types of loans to help you make an informed decision during loan application. Check out this guide for insights into the same.
Home Equity Loan
A home equity loan is among the most common secured loans. And as the name suggests, this is a type of loan that uses your home as collateral.
Ideally, your home equity must exceed the amount you wish to borrow. Home equity is the difference between the current market value of your home and how much you owe for it. You can only borrow a maximum of 85% of your home equity.
Home loans are a convenient solution for anyone who owns a home and needs fast cash, perhaps to boost their business, settle bills at home or make a huge purchase.
The best part is that home loans feature affordable interest rates. You have the freedom to use the loan for a range of purposes, from home improvements to settling medical bills.
The only drawback is that if you default on the agreed loan payment terms, you risk losing your home. Therefore, before applying for a home equity loan, ensure you have a reliable repayment plan. The payments should be within your budget.
Personal Loans
Personal loans are a type of unsecured loans. This means you do not need to offer collateral to be eligible for this loan. You can easily qualify for a personal loan, provided you have an attractive credit score. Even better, the loan takes the shortest period for approval.
With reliable lenders like Farmers Bank, you can acquire personal loans at much lower interest rates, especially when borrowing large amounts.
Furthermore, you have the freedom to use the borrowed money for a variety of purposes. You may choose to gift yourself with a gadget, fund a trip or settle bills at home.
You may also use personal loans to consolidate debt. For instance, you can borrow a personal loan, which features a low-interest rate. Use the amount to settle higher-interest loans, such as credit cards or student loans.
Nonetheless, you must offer proof of assets and undergo income verification before getting the loan. Personal loans feature short payment periods. Make sure you can comfortably repay the agreed amount within a few years and that the interest is within your means.
Credit Card Loan
Personal loans and credit card loans are often used interchangeably. While they both give you access to fast emergency cash at specified interest rates, the mode of borrowing differs.
Every time you use your credit card to purchase or pay for a service, you can term that as a credit card loan. If you pay the balance immediately in full, you will not pay any interest. Otherwise, if you leave any unpaid debts, you have to pay interest every month.
Your credit card gives you access to funds for as long as your account remains open and valid. Your credit score will significantly influence your eligibility for this loan type and the amount you can borrow.
Unlike personal likes, credit cards have a specified limit. You can borrow money repeatedly until you exhaust your limit. Credit card loans are convenient and are a great way to exercise financial discipline to avoid spending more than the set limit.
Home Equity Lines of Credit
One of the benefits of owning a home is the opportunity to build equity and use the equity to borrow low-interest loans. Abbreviated as HELOCs, home-equity lines of credit are more like credit card loans. But in this case, it uses your home as collateral.
You can use, repay and even reuse the home-equity lines of credit for as long as your credit account stays open. The account is typically valid for between ten and 20 years.
One characteristic that makes home equity lines of credit differ from the standard home-equity loans is that its interest is tax-deductible. The reason being, the interest rate is not set at the time of loan approval. You will be accessing the funds for as long as your account is valid, so the interest rate is variable.
HELOC is a great source of cash to renovate your home, consolidate debts, and make significant purchases. The loans are secured against your home value. Therefore, most lenders will offer lower rates, and you have the benefit of accessing the loans as you choose.
Title Loans
Do you own a car and are in dire need of fast cash? Your car title is your ticket to access cash that you may otherwise not be able to raise in cases of emergency.
Title loans are a type of secured loan that allows you to use your car title as collateral. You can borrow up to 50% of the value of your car. However, you must let the lender place a lien on your car title. And you are expected to surrender the title in the form of a hard copy in exchange for the loan.
Title loans are ideal for individuals in need of small loans ranging between $100 and $5,500. However, the only drawback is that the loans feature a short repayment term of 15 to 30 days. Failure to repay within this period will lead the lender to repossess your car.
Enjoy Financial Freedom With Different Types of Loans
You no longer have to put your dreams on hold due to financial constraints. Loans allow you to meet your needs and repay the money later. Now that you understand the different types of loans, their benefits, and their drawbacks, you are better positioned to make a sound borrowing decision.
Most importantly, set a budget first and ensure you have a reliable income source to help you repay the loan plus interest rates within the agreed term.
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