You do not apply for a loan on a whim. There are a lot of factors to consider before putting yourself in an irreversible situation. You have to remember that once you put your signature on that contract, or at least after the usual 3 day grace period, there is no turning back. If, by any chance, you are unable to repay your debt, you could be in grave trouble.
Secured and unsecured loans are the most common loan types. A secured loan is usually taken out against collateral. The process of acquiring this kind of loan is much quicker especially for those who have bad credit history and low credit rating. Since there is already a tangible asset that can be defaulted to if the loan remains unpaid, finance institutions give much lower interest rates for secured loans.
But if you fail to pay, you will have to be ready to give up your property. An unsecured loan on the other hand is usually given to people who have good credit history as well as high credit scores. These are some of the reasons why the secured loan is generally more popular.
Once you have decided on which loan type you will be going in for, you will have to consider other details.
Interest Rate: Even if this is one of the most important details governing our decisions, you should not be blinded by faulty advertising. A lower interest rate is a good thing; but it also means that the repayments will carry on over a longer period of time. If the interest rate is reasonable compared to the loan term, then go ahead and sign those papers.
Loan Term: A lot of loans have fixed terms, usually 15, 20, 25 or at most 30 years. Some lenders will enable you to change the term, if they think you can pay the whole debt off within half the time. But this may not be an option that lenders will willingly offer. Ask your bank if they offer opportunities to pay them back earlier or later, and how the change will affect your interest rate as well as monthly payments.
Hidden Charges: Make sure you read the fine print before finalizing a deal. There might be charges you are not aware of, especially for home equity mortgages. Find out about things like early repayment fees, penalties, arrangement charges and the like.
Floating or Fixed Rates: If you availed of a fixed rate loan, then you know exactly how much you will be paying every month. Chances are your parents had a fixed rate loan on their first mortgage, because it was the only one available to them during their time. Over a period of time, we saw the rise of the floating rate loan and mortgage.
This is also called an adjustable or flexible loan in some cases, as the interest rates vary annually or quarterly, depending on the terms of the loan. So depending on the way in which the economy is going, you could end up paying more, or less interest than others.
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