If you are short on cash or are looking to make a major purchase that you will pay for over time, you may need to take out a loan. While there are many loan types, not all loans can or will meet your needs. How do you decide if a particular loan is the one that is best for you?
Lower Interest Rates Are Always Better
Personal loans or credit cards offer access to quick cash, but you have to repay the loan at a high interest rate. Unless you have the opportunity to apply for a 0 percent interest credit card, you may want to stay away from this particular loan type. Payday and other loans that don’t require a credit check may also be worth staying away from. Generally, you will pay more in interest for an unsecured loan as opposed to a secured loan.
Can You Afford to Lose Your Collateral?
If you choose to take out a secured loan, you could lose your collateral if you fail to repay. For instance, a home equity loan requires you to put up your house as collateral. Failing to make one or more payments could result in you losing your house. The same is true if you used your car as collateral or any other property that you secured the loan with.
How Long Do You Have to Repay the Loan?
Credit cards can be repaid over several years or decades. As long as you make the minimum payment, you will remain in good standing. Home equity loans or lines of credit also tend to have longer repayment terms. Personal loans may have repayment terms of as little as three years. Payday and other no credit loans may need to be paid back within 30 days. While you always want to repay your loans as soon as possible, you also want to make sure that you can afford each payment that you make.
Can You Refinance or Prepay Without Penalty?
With a payday loan, you can ask for more time to repay your loan. However, you will be charged a penalty. While not common, you may also be assessed a penalty for paying off your loan early. This could impact your ability to refinance your current loan as it involves paying off your current loan before the term expires. If you cannot refinance or pay off your loan early, you may want to look for loans where this is a possibility.
Just because you can take out a loan doesn’t mean that you should. It is important to look at your options and make a decision that makes sense based on your personal situation. You may want to shop around to make sure that you get the best terms and rates on any money that you borrow.