There are conflicting opinions about loans in different quarters. Some people say we should live a debt free life, others say we should use ‘other peoples’ money (OPM)’for projects and business ventures. One might tend to get confused by the different opinions, but the truth of the matter is that there are instances in which one would need a loan to get by.
Take for instance a business person that needs to expand their enterprise or a salary earner that encounters a medical emergency that’s beyond their income. These individuals most definitely would need a ‘leg up’ financially. That is why banks and financial institutions have business loans and consumer loans.
In this article, we will discuss briefly how to get the benefits of consumer loans. This means using a loan to better your life rather than using it to drag yourself into financial slavery. Let’s start by defining consumer loans.
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What Is a Consumer Loan?
Consumer loan is a financial product that is designed to help individuals or families to fund their expenditures. This can be their daily expenses, paying medical bills, purchasing a vehicle or even buying a house.
There are 5 types of consumer loans and they are as follows:-
- Personal loan- This is the broadest category of consumer loans because they give the borrower the leeway to do as they please with the funds borrowed.
- Auto loan – This is specifically given to facilitate the purchase of an automobile.
- Mortgage loan – This is used for the purchase of a home. It can also refer to taking out a loan on the back of the equity of a property.
- Student loan – This is a credit facility that is extended to students to help them with tuition and other expenses in the course of their academic pursuit.
- Credit cards – This is a line of credit that allows the card holder to make purchases and then pay off monthly.
All these loans fall into 2 broad categories – secured and unsecured loans.
This is a loan that is backed by an asset known as collateral. The borrower put up an asset of equal or higher value than the amount borrowed. And in the event of a default by the consumer, the asset is repossessed to recoup the funds borrowed.
Auto and mortgage loans are 2 types of consumer loans that must be backed by collateral. Most often the car or house purchased is the collateral.
This type of loan usually comes with lower interest rates because they pose lower risks for the lender.
As the name implies, this is the opposite of the above. This credit is given on the strength of the borrower’s creditworthiness. Lenders would usually look at the credit history of the applicant, their income and consistency thereof and the general state of their finances.
This type of loan comes with higher interest rates because they are riskier for the lender. Unlike the secured loan where the lender has an asset that can be repossessed to recoup their funds, the unsecured loan has no such surety. Therefore, the application process can be more stringent and the interest rates steep.
How to Get the Benefits of Consumer Loans
A good number of people have gotten into a financial mess because of loans that were not properly managed. Some took out secured loans and at the end of the day had to forfeit the collateral they put up. Others have had to pay so much in interest that it diminished whatever value they got from the loan.
In this segment, we will share tips on how to borrow without collateral (låne uten sikkerhet) and at the same time get the best rates and terms and conditions.
Maintain a Healthy Financial History
While it is true that anyone can have a financial emergency at any time, there are people who stand a better chance to get loans without collateral. These are those that have a healthy financial history.
This is marked by a steady source of income and a consistent pattern of expenditure. In addition to these, you are expected to have a growing cash balance and a debt to income ratio of at least 36%.
Ensure that Your Credit Score Is High
Your credit score is part of your financial history and it is the measure of your creditworthiness. It shows whether you always pay your debts on time or you default. For folks who want to take out a loan without collateral, the lender will be stricter with their requirements and one of those requirements is your credit score.
If you have a credit score that is lower than 650, it will be more difficult to get a low interest, no collateral loan. Although there are lenders that give credit facility to people with low credit scores, their interest rates are usually high and their terms and conditions steep.
Never Borrow for Frivolous Reasons
Financial intelligence is marked by knowing how to handle one’s finances. Know when to take out a loan and when to rearrange your budget. Many folks have gotten into financial mess because they did not take out time to know the right step to take.
There are issues that may not warrant taking out a loan; let’s assume that you want to have a destination wedding but you do not have the funds. Is it in the best interest of your financial future to take out a loan? Can your income weather monthly payments without putting a strain on your finances? What about throwing that grand birthday bash? Is it wise to take out a personal loan for it?
We always advise that people take out loans for issues that are really important; maybe a life and death emergency situation? Or a home or auto purchase or tuition fees and issues like that. Do not take out a loan to satisfy a whim, you may end up regretting the decision while paying dearly for it.
Never Borrow More than You Need
Some lenders have a way of getting people into bondage; they look at people with great credit scores and make mouth-watering offers to them. Do not be drawn in by the pleasantness of the customer care person at the point of making these offers. Ensure that it is absolutely necessary before you take out a consumer loan and at the same time never accept more money than you need per time.
Have a Solid Repayment Plan and Stick To It
It is important to have a solid plan for repayment even before you start the application process. Do not borrow money and ‘hope’ to pay it off. If you do not have a steady source of income, it might be best for you to solicit financial help from friends and family or on platforms such as ‘Go Fund Me’
For those who have a repayment plan, put a system in place that will help you stick with the plan. A standing debit order on your account is a good way to stick to your repayment plan.
All that we have shared above are factors that will help you make the most of consumer loans. With these tips, you can get the loans to work in your favour and not against you, so bear them in mind at all times.