Emergencies are some of the things life throws at us. One minute everything’s great and the next, you’re faced with one problem that requires a lot of money to be solved, and quite often, we don’t always have that spare cash lying around at that exact moment.
An emergency can be anything from an accident to a health problem in need of urgent surgery or making a down payment for a competitive commercial space. These and a host of many others are events that could put one in a tight spot financially. One can say that loans, debts, or credits (as we’ll use interchangeably) exist largely for emergencies like these that need to be addressed as soon as possible.
No one will argue that many people have successfully gotten out of different kinds of problems with the help of a timely loan available to them.
Although credits may be available for anyone to apply for, there are many factors that affect the approval of such applications. These factors include the following:
- A person’s credit score
- Ownership of assets for collateral that equal the value of the loan amount being applied for
- Size of income
- Employment status
- History of previous loans, if existent
Aside from a customer’s application being approved, all the information mentioned above also influences the size of the loan a consumer can get. As you may have guessed, the higher a borrower’s credit score, income, and the value of their assets, the larger the loan size they can receive.
What are Consumer Loans?
Consumer loans or credits are given to consumers to finance certain expenditures or solve emergencies. Common examples include auto loans, credit cards, student loans, mortgages, and personal loans.
The requirements for credit applications may vary from country to country, however, there are certain criteria like a certain credit score and loan history that are common to every country when applying for a loan. People living in Norway for example could run a simple Google search for say, consumer loans in Norway or forbrukslån Norge, if they’d like to do so in their native dialect.
Types of Consumer Loans
There are two main types of consumer loans, these are:
- Secured loans
- Unsecured loans
Secured loans are those that are given to a borrower who has tendered an asset or several assets as collateral or surety for the credit. This type of credit is termed secured simply because, in the event that the borrower defaults, the lender can easily liquidate the borrower’s assets to repay the funds transferred to the borrower.
Auto loans and mortgages are common secured credits because the item being financed by the advance serves as collateral for the deal. These two loans work similarly. For instance, if a consumer takes out an auto credit and defaults, the lender simply claims ownership of the vehicle in question. The same is true for mortgages and, as a matter of fact, the lender owns equity in the property until the mortgage has been paid in full. So, if the consumer defaults, the property is seized by the lending institution and sold off to recover the money lent to the borrower.
Pros and Cons of Secured Loans
- With this loan, customers can borrow larger sums than what would be available if the borrowed funds aren’t secured.
- It’s easier to qualify for a secured loan than one that isn’t unsecured since the lender is exposed to less risk. Consumers who are self-employed or aren’t confident in their credit history but have an asset that can be used as collateral can certainly benefit from this type of credit.
- Interest rates are typically lower than unsecured credit.
- You’re at risk of losing the assets used as collateral if you’re unable to meet up with your monthly payments
- The credit may have a variable interest rate, which means you may pay more over time. So, make sure you confirm that the interest rates are locked, if it is something you’d like, before signing the documents.
- Most secured debts are paid over longer periods than unsecured debts. What this means is that although you may be making lower monthly payments, overall, you’ll be paying more in interest.
- This type of loan often comes with expensive closing costs and other charges. So, ensure all of these are factored in when deciding. These charges are usually included in the Annual Percentage Rate of Charge (APRC). Unsecured loans also have an Annual Percentage Rate (APR) which is like the APRC; consumers can use both to compare products when shopping for a loan. Click here to learn more about APRC.
As you may have gathered from the name, this loan is not backed by any collateral. There is no security and if a consumer defaults, the only way for lenders to recover their funds is by filing a lawsuit. Lenders basically give out these advances based on their evaluation of a borrower’s credit score, history, and promise to pay back. Examples include personal lines of credit, credit cards, student, and personal loans.
Institutions that give out unsecured credits typically charge higher interest rates because of the high risks involved; therefore, these types of credits are only made available to the most credible consumers. That said, Consumers that can meet all the rigorous requirements needed for these types of credit qualify for the best advances available.
Pros and Cons of Unsecured Loans
- Consumers suffer no risk to their personal property since no assets are put down as collateral, as is the case with secured debts.
- Although unsecured credits are mostly given to the most credit-worthy borrowers, those who meet the criteria have so many options and lenders to choose from. Also, the application for credit cards and personal loans can be done from the comfort of your home.
- Unsecured advances can be disbursed to a borrower within minutes of applying, the longest it takes for funds to be disbursed is usually 24 hours.
- The eligibility requirements for these loans are rigorous and can be demanding. This is because of the high-risk lenders are exposed to, since in the event of a default, theymay spend extra money filing a lawsuit to recover the owed funds. So, in a bid to lower their risk, they only give out credit to the most credible consumers who have an exceptional credit history.
- Being unsecured, the interest rates of these debts are way higher than those that are backed by collateral.
- Due to the absence of collateral, lenders in a bid to manage their risk give out smaller amounts than secured credits.
- Unsecured credits typically have shorter repayment periods.
Categories of Loans
Loans can further be broken down into two categories, these are:
- Open-end Loans: This type of advance is also called revolving credit. Borrowers can use this credit to make any type of purchase. However, a minimum percentage of the loan must be repaid with interest on or before a specific date. If the consumer is unable to settle all the debt before the expiration of the overall debt term, interest is charged.
Credit cards are an example of open-end consumer credit. The borrower can carry out transactions with the card but must repay the debt when due. If the consumer defaults, interest will be charged on the outstanding until the debt is paid off completely.
- Closed-end Loans: Unlike the open-end loan, closed-end credits can only be used to make specific purchases. Also, these credits are secured, and the borrower makes equal monthly payments over the lifespan of the credit. Being secured, if the consumer defaults, the lender is authorized to seize the assets presented by the borrower for collateral.
Both secured and unsecured advances have pros and cons as discussed above. Therefore, before choosing which type of loan to apply for, consumers should carefully consider their options and examine their financial situation.