There are a million reasons why people take out loans. Some do it for the obvious life starting purposes like buying a car, attending school and purchasing a home. Others take out loans for more abstract needs like plastic surgery, adoption and even mail order brides, as reported by one loan site.
According to the Washington Post, borrowing recently rose by $17.1 billion over the course of one month. This drove total borrowing close to the recession’s all-time high reached in July 2008.
Though you may cringe when considering the consequences of borrowing during that time period, there are plenty of scenarios where you simply can’t help but take on a loan. Before you sign your unsecured loan agreement, make sure you’re taking out the loan that is right for your situation.
It’s Not a Payday Loan
For many, the term “personal loan” immediately brings payday loans to mind. Simply put, unsecured personal loans are much different from their unpopular short-term relative.
A payday loan is infamous for having triple digit interest rates, a very short repayment period and small loan amounts. Often borrowers take these out to bridge an income gap or pay for an emergency.
An unsecured loan on the other hand has much more manageable APR’s, a longer loan term and offers borrowers amounts in the thousands rather than in the hundreds.
Furthermore, creditworthiness comes into play with unsecured loans. In short-term borrowing your credit score can neither hurt nor help you. Your payday loan amount and interest is based almost entirely on employment and salary. Though this can be beneficial for consumers with really poor credit, borrowers with a slightly better track record will benefit more from an unsecured personal loan.
If you were to borrow the maximum payday loan amount of $1,000 for a month and have an interest rate of 336 percent, you would pay $280 in interest. If you struggled to repay the $1,000 plus interest in a month, the interest would grow exponentially, not to mention the fees that could be tacked on for late payment or extensions.
On the other hand, if you were to borrow that same amount as an unsecured loan with an interest rate of 25 percent and a loan term of 12 months, you could keep payments under $100 a month and would accumulate only $140 in total interest.
A payday loan has its purpose, but for those with some credit under their belt, an unsecured loan can present a more manageable and less costly option.
It’s Not an Equity Loan
An unsecured loan’s benefit is also its pitfall. Because it’s “unsecured” there isn’t any collateral attached to the loan. If something should go wrong with repayment, you don’t have to worry about any of your property being repossessed.
However, this type of loan is more risky for lenders, so often the interest rate is higher than on a mortgage loan or car loan.
People tend to struggle when deciding between an unsecured personal loan and a secured loan borrowed against their home equity because the pros and cons of both are so evenly matched.
Weigh your options based on what your repayment capabilities are. If cash is really tight, but you can’t avoid borrowing money then you’ll want for your payments and interest to be as low as possible. The best way to do that is with a home equity loan.
With the recent housing market, however, equity can be hard to come by and the credit score required is often out of reach.
If you have a little wiggle room in your monthly budget, an unsecured loan can get you the cash you need and leave your possessions untouched.
It’s Not a Credit Card
An unsecured personal can actually be a safer route than applying for another credit card. If you need cash for a one-time purchase, don’t put your credit score at risk by reaching for more plastic.
An unsecured loan outdoes a credit card for a number of reasons:
- It typically has lower interest
- The loan amount can be bigger than a lot of card limits
- A loan term guarantees you’ll pay off the debt instead of keep it revolving
- There is no temptation at the end of the loan to make another purchase
Credit cards are nice for minor purchases and can even help in a crisis or cash shortage, but they shouldn’t be acquired for one single purchase. It opens up too many doors to landing in debt.
Having a savings account or cash is always going to be the most safeguarded way to make large purchases, but it’s not always a reality. Last minute needs and major events can present a bill beyond your immediate means. Make sure that when you search for credit, that you’re exploring the options that will benefit you most in the long run.
Tags: credit cards, payday loans, personal loans, unsecured loan agreement