Choosing the right loan

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There are different loan options available which often vary based on interest rates ability to roll in costs, the required loan value, and certain other factors. When opting for loans, it is advisable to choose a loan that corresponds to your specific needs. A lot of considerations such as the purpose of the loan, the duration of the loan, and the impact of interest rates need to be analyzed before choosing a loan type that would best satisfy your needs.

The most basic loan types could be said to fall under two categories thus: specific loans and personal loans. Or high priced business loans such as bridging loans that often cover a big gap between purchasing real estate investments.

Specific loans Vs Personal loans

Specific loans are loans which are giving in order to satisfy a specific need. Some examples of specific loans include renovation loans, car loans, and study loans.

  • Renovation loans are useful when undertaking property renovation projects.
  • Study loans often provide additional allowances for the benefactor and usually do not incur interest charges during the loan period, which is the period of schooling. The interest charges are activated on the graduation year when the loan benefactor would be able to obtain a good source of income to be able to pay off the charges.
  • Car loans are secured loans often use the purchased car as collateral for the loan. Car loans are a type of secured loan. Renovation and study loans fall more under the category of unsecured loans.  

Personal loans

Personal loans offer upfront lump sums for use as the borrower sees fit. Interest rates for personal loans are often higher than those of specific loans. Personal loans are very useful in times of urgent capital needs. They have an added advantage of having a longer payback period.

When making the decision to take a personal loan, certain factors need to be considered such as the loan tenure, effective interest rates, pre-payment charges, and processing fees. It is very important to analyze these factors because they inform the borrower of his ability or inability to afford the loan.

Bridging loans are an example of a personal loan. They are used when there is a gap between the period of plenty and the period of apparent need. It is a type of short-term loan that offers the opportunity to build a new property while still occupying another property. It normally allows a period of 12 months to sell the current property so as to obtain the funds to settle the loan.

Secure Vs Unsecured loans

Secure loans: are loans that place a lien on a property which serves as collateral for the loan. The deed or title for such property is held by the loan company until the loan has been serviced in full. Secured loans are adequate when large amounts of capital are needed by a borrower.

Unsecured loans: on the other hand are loans that do not demand any property asset as collateral for the loan but instead make use of the 5 Cs of credit (character, capacity, capital, collateral, and conditions) to measure the creditworthiness of the loan applicant. Credit card purchases and study loans are examples of unsecured loans. Interest rates for unsecured loans are often higher than those of secured loans.

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About Editorial Team 56 Articles
Watch My Wallet has everything you need to know about money, written by real people who’ve been there. Inspired by the philosophy of Early Retirement Extreme (ERE), our goal is to make informed decisions about our finances in order to achieve financial independence.

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