The Lo(an) Down – A loan guide

More and more people are turning to loans for an extra boost of cash in these tough times – but it’s a risky game to play. Statistics from the Federal Reserve indicate consumer debt, such as money borrowed from credit cards and loans, stood at nearly $2.4 trillion in 2010 – nearly $7,800 for every person in the U.S. The good news is consumers are working hard to dig themselves out of debt. Figures from the American Bankers Association show that the US consumer delinquency rate (late credit repayments) fell in second quarter of last year and suggest that individuals are wising up to the dangers of late or missed loan repayments.

Loan Guide – Types of Loans

Our loan guide below has been designed to explain the various types of loans available on the market so consumers can know exactly what they are getting themselves into when searching for a loan.

Unsecured loan

An unsecured loan is one which is backed against no particular asset – this can be compared to a secured loan which is usually secured or guaranteed against a property. Due to the current financial climate, unsecured loans which were once readily available are now harder to come by. Despite this, borrowers wanting smaller loans over a shorter period of time will find an unsecured loan their best option. As a rule of thumb, unsecured loans are more readily available for smaller amounts of money usually up to $25,000 as there is less at stake for the lender. Although there is much less of a risk of having your assets repossessed should you fail to meet repayments, you may however pay a higher interest rate than that of on a secured loan.

Secured loan

A secured loan, also known as a homeowner loan, is borrowed money which is secured an asset – something of financial value – that you own such as a property. Banks and lenders are more willing to lend if a loan can be backed against an asset, particularly on larger amounts from $40,000 plus, because it proves less risky for themselves.

Our current economic situation means that lenders are much more cautious lending out unsecured loans for which they have no guarantee of repayment. As a result, secured loans – which were once considered as a last resort option – are now in use more than ever. Indeed, if you are a borrower with a less than perfect credit history it is now much easier to access a loan which is secured against your property. Although the consequence of late or failure to meet repayments can be severe – at worse your home could be at risk of repossession – you may be charged less interest on a secured loan compared to an unsecured one.

Other loans also fall underneath the secured loan category and will depend on your mortgage status; a second charge loan is one that is secured against a mortgaged household, whereas a first charge is one secured against a property in which the mortgage has been wholly repaid, or in other words, owned outright.

Auto Title Loan

An auto title loan is a specific type of secured loan which is guaranteed by the borrower’s vehicle. The amount borrowed is usually based on the value of the car. Auto title loans typical have term (the repayment time frame) of one month and loan sizes usually range between $600 and $2,500.

Payday loan

Payday loans, also known as cash advances, are small unsecured loans which are usually paid back by the borrowers next pay check. Best used as a short-term loan solution, they are often used for paying unexpected large bills. Borrowers should be aware that payday loans which are not paid back promptly are at a very high risk of spiraling out of control. Some lenders are known to offer the loans with interest rates costs regularly exceeding 30% a month with hefty late or missed repayment charges to boot. Although hugely controversial in the US – a number of states have passed laws capping maximum interest rates – a payday loan is still a viable borrowing option if used with caution.

Consolidation loan

Consolidation loans, also known as debt consolidation, is a method of combining a number of existing loans into one single new loan. Used carefully, it can often be a good way of controlling your finances by managing and monitoring multiple and often confusing loan repayments and deadlines. They can also potentially lower monthly repayments by offering smaller interest rates and by spreading the repayments over a longer period of time – although this means you may pay more in the long run.

Whilst it may be best to avoid borrowing money wherever possible, sometimes our financial circumstances mean that you will need that extra cash injection. 0% interest, or interest free loans, are particularly rare to come by these days which means that you will always be paying more than the original amount you borrow. Whichever loan you chose, always read the terms and conditions of your contract; weigh up both the positive and negative aspects and make an informed decision.