Why Taking Out a Loan Sometimes Makes Financial Sense

Loans are financial tools that allow us to use credit in order to pay for things that we don’t have the cash on hand to purchase. For the vast majority of people big-ticket items like a car or home would be impossible to buy without a loan.

Taking out a loan is a serious financial commitment, but if they’re managed right they can actually help you build a credit history that makes it easier to get financing in the future. Part of the process is knowing what type of loan will work best for your needs.

The information below is a quick overview of different loan types and when they make financial sense.

Alternative Payday Loan

Payday lending became infamous before the recession, because of the outrageous interest rates and one-sided terms. They also created a cycle of borrowing-paying interest-borrowing because, let’s face it, people who get behind aren’t going to have the cash to pay off the principal be their next payday. So they have to take out a new loan to retire the first one. But they did serve a purpose. When you have an emergency expense come up or unexpected loss in income bills still have to be paid. Payday loans were a way to bridge the gap in the short term.

Today securing an alternative payday loan is a sounder financial solution when you need cash quick. Small loans up to around $2,000 can be made in a matter of a day or two and repaid in installments. Knowing what your obligation is and having more than just a few days to repay the balance is a huge help.

Personal Loan

A personal loan is similar to a payday loan in that it can be used for a variety of purchases. However, there are key differences. For starters, personal loans are typically made through a traditional bank. Personal loans are also usually for much larger amounts than an alternative payday loan.

Another key difference between personal loans and payday loan alternatives is creditworthiness. To get a personal loan, lenders want to know that a person has good to excellent credit. Personal loans come with better rates these days, but they aren’t always easy to find.

Auto Loan

One of the most common types of loans is an auto loan. They can be made through a bank, private lender or car dealership. Before you start looking for a car it’s a good idea to consider your auto loan options.

Decide how much you can put down and check your credit score before talking to lenders. Those two factors will influence the terms of the loan and how much you can qualify for. The thing to watch out for is the overall cost of the auto loan because most cars lose value as soon as it’s driven off the lot. That makes it easy to get upside down on the loan if you stretch out the term length or make a low down payment.

Mortgage Loan

When it’s time to set down roots in a home of your own, the first step is talking to a lender about getting a mortgage loan. These are very large loans and require a certain amount of risk for lenders. The home being bought can serve as security for the loan, but because of the amount lenders are still very careful.

There are many types of mortgage loans, some of which are available to almost everyone and others that are relatively exclusive. Lenders can also have their own individual mortgage loans that are offered regionally. That’s why it’s important to talk with several lenders and weigh your options.

There is also a myriad of terms that can impact how much a mortgage loan costs. One of the most important terms is the interest rate, which is heavily dependent on creditworthiness. If you have less than perfect credit you can expect to pay a higher interest rate and probably have to make a larger down payment to offset the perceived risk on the lender’s end.

Home Equity Loan

Once you’ve owned your home for a little while and the value has appreciated you can leverage the equity that’s built up. Equity is the difference between the amount owned on a mortgage (if one exists) and the market value of a home. In other words, it’s the proceeds you’d make if you were to sell your home.

With a home equity loan, you use that as collateral and tap into the value you’ve gained. People commonly use home equity loans to fund home renovations, purchase a second home or pay for their kid’s college education. The interest rates are generally good and the primary requirement for approval is having equity in your home. Just keep in mind that failing to pay back the loan could put your home at risk.

Loans are how lenders make money and how consumers buy many things the want or need and they come in all different sizes. Money does, in fact, make the world go around so it seems.