Should you take out a loan? If most people were asked this question, they’d likely reply with a lot of doubt. Most people who need to borrow money think about it before taking the plunge, usually because they need the money to cover expenses that may go beyond their means.
The most common reasons to take a loan usually involves car purchases, home purchases, financing a small business and buying precious commodities like wedding bands and even electronics.
Before you think about taking out a loan, learn more about your options. In this article, we’re going to briefly review several different types of loans.
Open and Closed
These loans can be borrowed on a frequent basis. They usually come in the form of credit lines and can be accessed through credit cards. People with this type of loan have a credit limit that they can purchase against, which decreases their available credit. As they make monthly payments, their available credit rises again, allowing them to reuse their credit again.
Closed loans, on the other hand, can’t be borrowed again when they’ve been paid off. When you pay off the balance of these loans, the balance decreases permanently, but it doesn’t allot you any available credit. If you wanted to gain more credit for this type of loan, you’d have to apply for another loan.
Mortgage loans, auto loan and student loans are the most common of this type. Interestingly enough, business loans tend to fall under either type, depending on what you may need the money for in regards to your business.
Secured and Unsecured
Secured loans typically use an asset as collateral against a loan. If the loan defaults, the lender is permitted to take possession of the asset in order to cover the loan. Secured loan interest rates tend to be lower than their unsecured counterparts and you may need to have your asset appraised before borrowing a secured loan.
Unsecured loans don’t use assets to secure against a loan. They tend to be harder to take out and may harbor higher interest rates. This loan tends to require borrowers to maintain good credit history and have a certain amount of income to qualify. If they default, however, they may be subject to various loan collection options enacted by the licensed money lender.
Related Read: Secured Vs Unsecured Loans
These short term loans are typically borrowed using a paycheck as an assurance to pay off the loan. People tend to take out these loans if they need to borrow more money if they’ve exhausted other financial options. These loans, however, tend to have high annual percentage rates, which makes them very hard to pay off. Due to this, it’s highly recommended to stay away from these loans.
Should I Get A Loan?
Loans aren’t for everyone. If you have doubts about taking out a loan, it’s highly suggested to research your options before going forward. Most of the time, a little research helps a lot with figuring out the best loan for your situation.
If you do think you should get a loan, ask yourself:
- Can I afford to make the payments on time?
- Can I pay off the loan as soon as possible?
- What will I do if I can’t pay off the loan in time?
As long as you can answer those questions, you may be ready to take out a loan—just don’t rush into it. Even if you can answer those questions, take more time out of your day to find answers. You’ll be glad you did.