Borrowing money to enhance and progress in life is a necessity. Most of us do not have the luxury to pay cash for large purchases and therefore, must get a loan. Individuals may be able to get a loan easily, but some may need a co-signer.
A co-signer is responsible if you stop making payments. They agree to the exact same terms and sign next to your name. Most co-signers tend to be a family member or somebody close which may cause financial tension. Have a payment plan ready and be sure you do not let it fall to the co-signer.
There are many things to consider when applying for a loan, such as loan type, terms, interest rates, and any other fine details. Some loans are straightforward while others may have collateral terms, etc.
What to Know Before You Borrow
Always be wary of the lender if they are not a financial institution. There are too many scams and easy ways to get a loan these days. Loans like this may be instant to get but will come with a super high-interest rate and not-so-common terms. Lenders like this prey on victims that have little knowledge of loan terms.
Best to go to a credit union for lower rates or check out your local bank and what they have to offer.
There are many different types of loans are there and it is important to know which ones apply to your situation. For instance, you would not take out a personal loan for college tuition. There are loans the federal government offers to anybody interested in a secondary-education.
Mortgages
Mortgages are loans that people take out to buy a home. They are typically the largest loans that people will ever take out. Choosing the right lender may be overwhelming so be sure to look around. Always consider a credit union because their rates tend to be lower than that of a bank.
Mortgages can be expensive and require a long-term commitment. They also carry some risks, such as the possibility of defaulting on the loan or facing higher monthly payments if interest rates go up.
There are two ways a mortgage comes in, fixed-rate or adjustable-rate.
- Fixed-rate Mortgages have an interest rate that stays the same for the life of the loan. This means that your monthly payments will be the same each month. Fixed-rate mortgages are generally considered to be more stable and predictable.
- Adjustable-rate Mortgages have an interest rate that can change over time. This means that your monthly payments could go up or down. Adjustable-rate mortgages can offer lower initial interest rates but carry more risk, as your monthly payments could increase significantly if interest rates rise.
When choosing a mortgage, it is important to consider your financial situation. If you are looking for stability, a fixed-rate mortgage may be a good option for you. If you are willing to take on more risk, an adjustable-rate mortgage may be a better choice.
Mortgages can help you build equity in your home and save money on taxes. They can also provide financial stability and predictability by using a fixed-rate mortgage.
Auto Loans
Auto loans are a type of loan that can be used to purchase a vehicle, such as a car, truck, or SUV. They are typically offered by banks, credit unions, and other financial institutions. The interest rate on an auto loan will depend on your credit score, the amount of money you borrow, and the length of the loan.
These loans typically have shorter terms than mortgages, often ranging from 3 to 7 years. This is because cars depreciate more quickly than homes, so lenders are less willing to lend money for longer periods.
To get an auto loan, you will need to provide the lender with some basic information, such as your income, employment history, and credit score. The lender will use this information to decide whether to approve your loan and what interest rate to offer you.
The interest rates on auto loans are also usually lower than mortgage rates because cars are considered to be less risky investments than homes.
Making all of your auto loan payments on time is critical. If you miss a payment, you may be charged a late fee, which can add up quickly. You could also damage your credit score, which could make it more difficult to get a loan in the future.
In some cases, missing a payment could even lead to the repossession of your car.
Student Loans
Student loans are loans used to pay for college or other post-secondary education. They are typically offered by the federal government or private lenders. Student loans must be repaid with interest, and the terms of repayment can vary depending on the type of loan.
Paying for college these days is becoming like having a second mortgage. There were times when you could go to school full-time, work in the summer months, and use that money to pay off the tuition. People may get into college on a paid scholarship or grants, but those who need to borrow should reconsider.
A degree today does not mean much depending on your field. If you are studying to be a doctor or lawyer then college is necessary. However, a business degree will not get you far. The best way to go about getting proper education is by taking individual courses relating to your field of interest.
These days there are plenty of courses online offered by various universities and corporations, like Google. Shop around and consider your options. Why pay for and waste time taking classes that have nothing to do with your field of study?
There are two types of student loans, federal and private.
Federal Student Loans
Federal student loans are offered by the U.S. Department of Education. They are typically the most affordable option for students and offer a variety of repayment options.
Here are the more common repayment options available to borrowers:
- Standard Repayment. This is the most common repayment plan. Under the standard repayment plan, you make equal monthly payments over a set period, usually about 10 years.
- Graduated Repayment. This repayment plan starts with lower monthly payments that gradually increase over time. This plan can be a good option if you have difficulty making large monthly payments in the beginning.
- Extended Repayment. This repayment plan allows you to make smaller monthly payments over a longer period of time, usually 20 or 25 years. This plan can be a good option if you have difficulty making large monthly payments.
- Income-driven Repayment (IDR). These plans base your monthly payments on your income and family size. There are four IDR plans:
- Pay As You Earn (PAYE) – Your monthly payments are 10% of your discretionary income.
- Revised Pay As You Earn – (REPAYE) Your monthly payments are 10% of your discretionary income, but they also include any unpaid interest that is capitalized.
- Income-Contingent Repayment – (ICR) Your monthly payments are 20% of your discretionary income.
- Income-Based Repayment – (IBR) Your monthly payments are 15% of your discretionary income.
Your Profession Can Matter
- Public Service Loan Forgiveness (PSLF). This program forgives the remaining balance on your federal student loans after you have made 120 qualifying payments while working full-time for a qualifying public service employer.
- Teacher Loan Forgiveness. This program forgives up to $17,500 of your federal student loans after you have made 5 years of full-time teaching payments in certain low-income schools or educational service agencies.
- Healthcare Professional Loan Forgiveness. This program forgives up to $35,000 of your federal student loans after you have made 10 years of full-time payments while working in a qualifying public health job.
- Veterans Education Benefits. If you are a veteran, you may be eligible for student loan repayment assistance through the Department of Veterans Affairs (VA).
Federal student loans have more flexible repayment terms than private student loans.
Private Student Loans
Private student loans are offered by banks and other financial institutions. They typically have higher interest rates than federal student loans, but they may offer more flexible repayment terms. These loans are problematic and, at one time, could be attained without providing income or proof you even attended college. Avoid these at all costs.
This may be your only alternative to getting more financial aid for school if you needed. Hopefully, you will not go down this road unless you firmly believe your education is worth the debt.
If you decide to not pay these back collection agencies will be coming after you quite aggressively. There is nothing the government can do to protect you from this so you better lawyer up and get them settled or at least consolidated.
Subsidized vs Unsubsidized
Student loans offered by the government will come in two choices, subsidized and unsubsidized. In some cases, you may have to use both loan types to cover schooling costs.
Subsidized student loans are federal student loans that do not charge interest while the borrower is enrolled at least half-time, during the six-month grace period after graduation, or during deferment or forbearance.
Contrarily, unsubsidized student loans charge interest from the time the loan is disbursed, regardless of the borrower’s enrollment status or repayment plan. Make a wise decision when choosing which loan type is best for you.
Deferment & Forebearance
Deferment and forbearance are both ways to temporarily pause your student loan payments. A deferment is typically granted for specific reasons, such as financial hardship or enrollment in school. During deferment, interest does not accrue on subsidized student loans, but it does accrue on unsubsidized student loans and private student loans.
Deferral does not affect your credit score.
A forbearance can be granted for any reason automatically by the loan servicer. During forbearance, interest continues to accrue on all types of student loans and can have a negative impact on your credit score.
In general, deferment is a better option than forbearance because it does not accrue interest on subsidized student loans. However, deferment may not be available to you if you do not meet the eligibility requirements. If you are not sure whether you qualify for deferment or forbearance, you should contact your loan servicer.
Personal Loans
Personal loans are a type of loan that can be used for a variety of purposes, such as consolidating debt, paying for a major expense, or making a large purchase. These loans will have higher interest rates than other types of loans, such as mortgages or car loans but may offer more flexibility in terms of repayment terms.
Personal loans can be either secured or unsecured. Secured personal loans are backed by collateral, while unsecured personal loans do not require collateral.
Whether or not a personal loan is a good or bad idea depends on your individual circumstances. If you have good credit and can afford the monthly payments, a personal loan can be a convenient way to borrow money.
If you have bad credit or are struggling to make ends meet, a personal loan may not be the best option.
Credit cards
Extremely common and rather easy to get are credit cards, which is a type of revolving credit. This means that you can borrow up to a certain limit and then repay the balance over time. Credit cards typically have high-interest rates, so it is important to pay off the balance in full each month to avoid interest charges.
Companies that offer credit cards will tempt you with zero percent APR for a certain amount of months. Sometimes offers like this can make immediate purchases more convenient provided you pay it off before interest kicks in.
Keep in mind, once you miss a payment, your credit score will be damaged and your APR will go up. Be cautious and smart while using a credit card or when trying to establish good credit.
Terms and Interest Rates of Various Loans
Different loans have different terms, interest rates, and in some cases collateral. Houses and vehicles are generally the collateral on those types of loans. If you stop paying the bank will take back the house or vehicle.
Depending on your circumstances you may be able to work out a settlement agreement if you cannot make payments. Regardless, the goal is to pay everything on time and paid off as early as possible.
Here are some examples of loan types along with their terms and interest rates:
| Loan Type | Purpose | Term | Collateral | Interest Rate |
|---|---|---|---|---|
| Mortgage | Purchase a Home | 15-30 years | Home | Fixed or Adjustable |
| Auto Loan | Purchase a Car | 3-7 years | Car | Fixed or Variable |
| Student Loan | Pay for College | 10-25 years | Federal or Private | Fixed or Variable |
| Personal Loan | Any Purpose | 1-5 years | Secured or Unsecured | Fixed or Variable |
| Credit Card | Purchase Goods or Services | Revolving | None | Variable |
Knowing about loan types and what they can offer you is something you can discuss further with your financial advisor. Seek advice from a professional and always shop around.
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Resources:
- Federal Student Aid
- Sallie Mae
- Forbes
- Featured Image Courtesy of Free Stock photos by Vecteezy