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Anyone with an interest in finance will have heard of loans but what are they and how do they work?
A loan is something that’s borrowed, with the intention to pay it back in the future. Loans are often sums of money that are repaid with interest. Interest is how lenders make money from loaning out cash.
There are many types of loans available. It can be hard to choose the right one for your situation. To help, I decided to try and make things easier for you. I’ve picked the three most common loans, and this guide will help you understand them:
Short Term Loans
I’ve used the expression ‘short term loans’ here because it describes a couple of loan options out there. These loans are the most popular of the lot. They represent a chance for people to get their hands on cash, fast. The most common types of short term loans are cash advance and payday loans. There are a couple of differences between the two that I’ll briefly talk you through now. A cash advance loan is typically unsecured and approved without a credit check. So, even if you have bad credit, you can get yourself one of these loans. Most applications are quick and can be completed within three minutes.
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A payday loan is also unsecured, but you will need to go through a credit check to get one. However, there are plenty of lenders that let you borrow the money even with a bad credit score. Unlike a cash advance, payday loans are often based on income and your financial situation. So, you can’t apply for loads if you don’t make enough to pay it back.
The main purpose of short-term loans is to provide money for people that are in tough financial situations. Perhaps there’s a bill that needs paying, but you don’t have the money at hand right now? You get paid in a couple of weeks, so would be able to afford it then. However, if you don’t pay it now, then you can incur additional charges and lower your credit score. In these situations, getting a loan is a fantastic idea. You can pay your bill, and be able to pay back the loan when you get paid in a week or two. This is a prime example of how to use a short term loan responsibly. Only apply when you’re 100% confident you can pay it back in time. These loans have extremely high interest rates, so the longer it takes you to return the money, the more it’ll cost.
Mortgage Loan
A mortgage loan is probably the biggest loan available to the public. It’s a loan that’s secured by property or real estate. Typically, people apply for a mortgage when they’re buying a home. You get given the funds to purchase your house and agree to return the payment within a time frame. You’ll find that mortgage loans can get complicated, as they’re not all the same. Some lenders will offer fixed interest rates; others will offer variable ones. Both of these options have their pros and cons; it’s up to you to make the decision for yourself.
How long will it take to repay your mortgage? Well, this will depend on how much you’ve loaned and how much money you earn. Typically, it can take decades to repay. Remember, we’re talking about huge sums of money here, houses aren’t cheap! However, you may find that you run into some money during your life and can repay it quicker. It’s important to note that you’ll never be the full owner of your property until you pay off your mortgage. And, if you fail to meet repayment dates, the lender can take your house away from you. So, it’s serious business, and you should only apply for one if you’re ready for the financial burden.
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Applying for a mortgage isn’t as easy as it is to apply for a short term loan. You need to have a full credit check before you’re approved. In a lot of cases, lenders are reluctant to give mortgage loans to people with bad credit scores. Your credit score will relate to how much money they’ll approve. If you have a poor score, you might not get as much as you hoped for. So, you should work on improving your credit rating before applying for one.
Auto Loans
An auto loan is a secured loan that people use to help them buy a car. Much like a mortgage, you use the car as collateral to secure the loan. If you fail to repay the money on time, the lender can repossess your car. Barring a mortgage loan, this loan could be the biggest one you take out in your life. The amount you borrow will depend on the car you’re buying and how much money you have. You may have the cash to cover half the costs of the vehicle you’re buying. In this case, you’d only need a loan to cover the other half. In some scenarios, people put a small deposit down on the car and need a loan to cover the entire costs.
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Again, auto loans are approved after a credit check. You can get bad credit car loans from some lenders, but a lot are reluctant to give them out. People don’t want to lend lots of money to someone that can’t be trusted to repay it on time. If this does happen, and you fail to make repayments, then you’ll end up with no car. And, you’ll have an even worse credit rating than before.
Where can you get an auto loan? Well, you can go to your bank and apply for one there if you so wish. However, banks don’t tend to approve loans for people with bad credit. So, your other two options are to look for an independent lender or a car dealer. Plenty of car dealerships offer financial help and will gladly give you an auto loan. Be warned, although dealers approve bad credit loans, their interest rates are often higher.
Hopefully, you’ve found this guide useful, and it’s provided some value to you. Now, you know about different loans and when you should apply for one.
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