Before you take out a secured loan, you should be fully aware of what you are signing up for. These types of loans can be massively beneficial as you organize your finances, but they don’t come without risks.
Before you sign the deal, read through this article to ensure a secured loan is the best choice for you.
1) Do You Meet The Requirements
Every lender should do a background check on you before allowing you to take a loan. However, if you are strapped for cash, it can be tempting to fudge the numbers in your favor.
Not only is this illegal, but it is also ill-advised. To qualify for a personal loan, you need to be 18 or older, have a regular income, and be a United States citizen.
This is vital information to stop identity thieves and also make sure you can pay the debt back.
For example, if you lie about your income, the bank will believe you can pay their high-interest rates. Then, when the charges come, you will put yourself in more and more debt as you fail to pay. This could have been avoided if your income had been declared correctly.
2) Is A Secured Loan The Right Loan?
Applying for personal loans with a low credit score can be a difficult endeavor. Depending on your reason for the loan, there might be an easier repayment method elsewhere.
Payday loan lenders, for example, don’t look at your credit score. They give you money fast, sometimes even on the same day. However, they also have high-interest rates and expect you to repay the debt quickly too.
Secured loans need to have an item approved for collateral. This means that you need an item (like a house, a car, jewelry, etc) that is worth the value of your loan. If you don’t have an item that fits these criteria, then your loan will be rejected. Rejected applications show up on your credit report.
Instead, you can opt for an unsecured loan, however, you will need a good credit score and will be charged a higher interest rate.
In reality, secured loans are often the safest and cheapest option; however, if you don’t have a high-value asset, it will be hard to receive.
3) Is The Interest Rate Good?
Ideally, you should pick a lender with the lowest interest rates possible. Normally, low-interest rates go hand in hand with good credit scores, however, each lender will have its own price tag.
Before taking out a loan with a specific lender, shop around for other options to see if their rates are better. Remember that the lower the rates are, the less you will pay in the long run.
4) Understand The Additional Fees
Although interest rates are the most important charge to consider, there will be additional fees attached to your loan. The most common are:
- Servicing Fee
- Establishment Fee
- Withdrawal Fee
- Early Repayment
- Early Exit
It could be that the lender with the lowest interest rate has the most additional fees. If they charge you for paying too much, paying too early, withdrawing the already agreed upon value, or more, then you should weigh up all of these costs (along with the interest rate) to see the total price tag.
You can ask for these details before agreeing to any loan. Make sure you follow through with this request so you have a full understanding of the agreement before you sign up for it.
Although a lender might look cheap at first glance, these finer details can show just how expensive they genuinely are.
5) The Term Of The Loan
The “term” of the loan is how long it takes you to pay back the lender. You will be given a pre-set term and a pre-set payment amount, which should stay the same until the final payment.
Make sure you are aware of how long you want to make repayments for and how it will affect your future financial situation. For example, if you are due to retire or change jobs, will you be put under financial stress due to the length of the loan. If so, you may need to discuss paying more for a shorter term.
If the lender doesn’t agree to the shorter term, you should consider talking to another lender. Protecting your future finances is just as important as managing your current situation.
6) How Do You Plan To Pay
Before you agree to a loan, you need to know how they expect you to pay and how you are planning on paying. For example, if the lender has an early repayment fee, you need to organize your payments in a way that keeps to their schedule. Otherwise, you will wrack up a higher debt.
If you get paid sporadically from your work, you should find a lender that allows you to pay whenever in the month. It could be weekly, monthly, or whenever your payment lands. Many lenders are okay with this, as long as you pay the agreed amount by the end of the month.
Navigating these questions will help you find the best loan for you, and it will also prepare you for any additional fees that might otherwise have come as a surprise.