When you need money for something regardless if it’s a home, car or vacation to the Bahamas, people use loans to help pay for them. Loans are great because they allow you to purchase items or services that you would otherwise be unable to pay for upfront.
If you need money, the question becomes what kind of loan should you get from home equity to payday loans. There are many types of credit and each has its own pros, cons, and requirements. If you’re confused about all the loans available, we’ll detail some of the most popular options available to you.
Variable vs. Fixed Interest
Before getting into the various types of loans, it’s important to talk about the difference between variable and fixed interest. When you get a loan, there is some percentage of interest placed upon it. When you pay the loan back, you pay the original amount plus interest. This is how the lender makes money.
Fixed interest rate is generally preferred by most people because it allows for the same payment amount throughout the life of the loan. Fixed rate means the interest rate you start the loan with stays the same. The better your credit score, the better your interest rate.
Variable rate interest means the rate can fluctuate with the loan market. For example, if you start the loan with a 3 percent interest rate and then something happens that causes rates to rise, then the next month your rate could be 5 percent and thus change the amount of your payment.
The opposite is also true where the rate can go down and actually lower the payment because the interest rate decreased.
Variable rates can be beneficial, but the unpredictability of the market makes it more risky for the person getting the loan.
Types of Credit: Home Equity Loans and HELOCs
When you buy your home, you slowly pay for it over time. As you pay, you own a certain value of the home, called equity. The more you pay the higher equity you own in the home.
Once the equity reaches a certain point, you can borrow against it through a home equity loan or a home equity line of credit (HELOC).
Home equity loans are standard installment loans. They’re often used for home projects, vacations or other one-time big expenses. You visit the bank and get the loan for the amount you need using the equity in your home as collateral.
You have a set payment period and monthly payments.
A HELOC is a line of credit, similar to a credit card. Instead of a set loan amount, you have a set line of credit such as $10,000. You can borrow any part of that at any time and then pay that portion back at your leisure as long as you make the minimum monthly payment.
If there are unexpected expenses such as a car problem, etc., you can use the line of credit to pay for it and then pay it back over time or all at once. You always have access and can use as much of it as you want. You can spend $400 on a car repair and the next day spend $500 on house paint.
You don’t always have to go to a bank to get a loan. Banks have rigid structures and requirements for their loans, but if you need a small amount of money right away and can pay it back quickly, then you might consider a payday loan.
They’re short term loans at high-interest rates that you pay off on your next payday. If you get a payday installment loan, you can make payments, but only for a few months because of the high level of interest.
Be careful not to get in over your head with payday loans. They should only be used for emergencies and only if you can pay it back. The high-interest rates can make them difficult to pay back if not done quickly.
Anytime you want a loan, especially for something large as a house or a car, you often need collateral. The bank’s biggest worry is that a person won’t pay the loan and they’ll have to go to various collection activities.
They don’t want to lose money, so they often want collateral before allowing a loan. For homes and cars, the collateral is the value of the loan object itself. The loaning institution is technically the owner of the item and you’re paying them back for it.
When the item is paid off, everything is transferred over to you.
You can also get personal loans using collateral as well. For example, if you need $2,000 for a vacation, the loaning institution will loan it but will require something of value in return.
Failing to Pay Loans Can Be Disastrous
The goal of all loans is to pay them off. There are few instances more triumphant than making that last loan payment. There are many times when circumstances make it difficult to pay a loan back.
The loaning institutions work with you to make arrangements. If you go too long without paying, they have no choice but begin collection activities.
You’ll first begin getting phone calls and letters telling you that your payments are late and to contact the lending institution. Late payments can impact your credit score and bring it down.
If that doesn’t work, then they can take you to civil court and get a judgment against you. This allows them to take money from your paycheck called a wage garnishment to pay off the remainder of the loan. A judgment can also wreck your credit score.
Banks are not in the business to sell property or cars. They hate it because they have to take care of and maintain the property until they can sell it.
The last step they’ll take is repossessing the collateral. This means taking the automobile or foreclosing on the home. This means you lose the property and all the equity you bought into it. This also goes for HELOCs and home equity loans.
Be Confident in Your Loan Strategy
There are all types of credit available to you to purchase items or services you need. Choose the one you want wisely so you get the best possible outcome. If you get a loan, make sure to pay it back on time and don’t fall behind.
If you want to learn more about these types of loans, then explore our site.