Once in a lifetime everyone will have this situation where he will find his financial resources falling short to fulfill his needs and wants. They may be for fulfilling their luxurious desires, education, home or may be for starting a new business or expanding the existing business. And in this scenario the best thing everyone will find is getting loans. Today, loans are available for almost all the things you want to do in your life, but before taking loans you should always consider various various things so that you don't get trapped in this vicious circle of debt. We have various types of loans which are available for different purposes and each type of loan comes with its positives and negatives, so lets understand all of them one by one to find out which one suits you best and which one you should avoid.
- Home Loans
You wish to purchase your dream home but lack finances, home loans are the best way to fulfill your dreams. These loans generally have a long tenure of 25-30 years and the best thing about these loans is that they come at a very low rate of interest. While buying the property you need to make a down payment of 10 - 20% and the rest of the amount is financed. Besides all the benefits of the home loan the only negative part is that you can lose the house in case you are not able to pay the loan. But you can definitely consider this type of loan over the others since they have a very low rate of interest and if you are already having multiple loans then you should always consider prepaying the loans which have a higher rate of interest even though home loans are of very long tenure.
- Personal Loans
Unlike other loans which are designed for a particular purpose, personal loans can be used for anything from fulfilling everyday needs to paying the bills or building the credit. Personal loans usually come with a heavy rate of interest and this could be one of the most expensive ways to get money as we do not put any collateral. These loans are generally of a short time period of 2-5 years and we just need to have some proof of income or an asset of the value equivalent to the loan amount. The loan is generally approved within two to three working days. The best use of personal loans is to pay existing credit card debts. As the interest rates in credit cards keep increasing and the amount keeps accumulating over the time and becomes extremely difficult to get them cleared, it's best to get paid by getting some personal loan which will have a much lesser rate of interest.
- Business Loans
Small business loans are very helpful to meet the everyday expenses of the business, expanding the existing business or even setting up a new business. Most of the cases it is used for expanding the inventory of the business, it may in the form of opening a complete new office or adding assets in the business. To avail this type of loan you need to have a business plan which will be reviewed before you get the loan and your personal assets will serve as collateral in case of any default on repayment.
- Vehicle Loans
You have an option of going with vehicle loans whenever you want to buy a new or a used vehicle and you don't have the entire amount or don't want to spend all the money with you. These types of loans are usually available for a term ranging from 1 year to 10 years and if you are 60 plus then the tenure will be kept shorter in most of the cases. Used vehicles will also have shorter tenure since all the vehicles are depreciating assets, and the vehicle itself serves as a collateral in this case hence you will have a maximum of 5 years loan term in case of a used car. The interest rates are also not very high so you may opt for these types of loans if you really need the vehicle. The approval and the amount of loan will depend largely on the basis of your salary and credit score.
- Student Loans
Student loan is a financial help to the students so that they can access their higher education. The biggest benefit of the student loan is that you don't have to worry about the repayment of the loan upto few months after completing the graduation and when you start earning you can repay the loan. You can choose federal student loans which come from the federal government or you can go for private institutions like banks and financial institutions. Loans that come from the federal government usually have more benefits but they are capped to a certain amount and hence you don't have any option to get beyond the limit even if you wish to. There are two main types of federal loans, subsidized and unsubsidized loans. Subsidized loans are meant for those having a financial need and in this case the interest is paid by the government till the time the student is in school. Unsubsidized loans are made available for students where financial need is not the eligibility criteria of providing the loan. The interest on the federal loans are fixed and generally less than other private institutions and they provide various flexible options for repayment of loans.
- Credit cards
Every purchase transaction on a credit card is a type of personal loan itself which can be very helpful and easily available at all the time but if you do not use the credit card properly and you are not able to pay the bills on time then the amount is just going to be pile up and it will be very difficult for you to clear all the bills at a later stage. If you pay the bills on time you will make the best use of your cards. The interest rates on the credit cards are very high and it keeps on increasing with time. Although if you pay the bills on the due date you will not be charged any interest on that.
- Cash Advances on the Credit Cards
Everyone who has a credit card has this facility of withdrawing some amount of money with his credit card from any ATM, which are known as cash advances. Although this feature comes in handy if you really need cash at any point and you don't have any other option to get cash, this is probably the most expansive way of getting the cash. The interest rates on cash advances are extremely high and may range from 25 to 35% plus the fee which may be 3-5% of the amount.
Mistakes to avoid before applying for any loan:
- Not Considering your loan requirement before applying.
- Forgetting to check your credit score.
- Ignoring your repayment capacity
- Not reading the loan agreement properly before applying for a loan.
- Applying without comparing different loan options available.
- Applying for multiple loan products in a quick session.
These are the most commonly available loans in the market depending on your personal needs. You may choose whichever is best suited as per your financial needs. If you are still not satisfied with taking out a loan to meet your financial needs, you can try out your hand in investments. There are several types of long term investments available in the market which helps you meet your financial goals.