This is business

No matter where you get your loan, the lender you use is only lending you the money to make a buck (or many) off of you. While most decent businesses will be honest about the costs (This is a legal requirement), it is not in their interests to tell you where to go to save a few hundred dollars.

Considering this, you should definitely shop around when looking for a personal loan company. While most personal loans do not have a payback term as long as a mortgage, you do not want to be a month into a five-year loan, only to find out the company around the corner is offering the same deal at a better rate.

Is the Company Reputable?

You do not want to deal with a “cowboy” operation that makes huge promises, gives you the money then starts charging all sorts of arrangement and admin costs that have been written into the fine print. Ask yourself:

- How long have they been operating? Yes, just because a company is new doesn’t mean it isn’t reputable (and vice versa), but it’s always worth checking into the company before you take the plunge.

- Do you know anyone that can recommend this company? If someone you know used the personal loan company and had a good experience, chances are you will do well with them too. Many companies are quick to offer testimonials from happy customers, but these will be edited to show the company in the best light possible. You may consider speaking to someone like ASIC (http://www.asic.gov.au/asic/asic.nsf) regarding the company if you have any doubts.

Does the personal loan company do secured or unsecured loans?

- A secured loan is called ‘secured’ as you use collateral that you pledge to give the personal finance company if you don’t pay back the loan. If the money lent is for a mortgage, the collateral is your home. With a car loan, you risk losing your car. With a personal loan, you might pledge something already mentioned, or perhaps another expensive item – Jewellry perhaps.

- An unsecured loan is similar to credit card debt, as there is no collateral to cover the personal finance company’s investment if you do not pay the sum back. This does not mean you will get away with missed payments however; the company will often get you back with late fees and so forth – Plus it can damage your credit rating.

How will your credit standing affect the loan company’s desire to do business with you?

If you have a bad credit rating, or even no credit history at all, some companies will not even humour you. Other companies, however, will be happy to take you on, albeit at a higher than usual interest rate.

-Another possibility is that the company will ask you to have a cosigner on the loan – If you’re young and have poor or non-existent credit history this is likely. What this means is that the company aren’t happy with just your assurance that the loan will be repaid (Which is essentially what your signature is on a loan application). The cosigner will also need to sign the loan documents, ensuring the company that they will pay back the loan if you default on it. Many people will not (or can not) cosign a loan however, as it is a massive financial responsibilty should you default on the loan.

Unfortunately, there are no absolutes when dealing with life, and that includes getting a personal loan. However, if you keep these recommendations in mind, ask any questions you have (no matter how dumb they may seem) and verify every step you take, then getting the money you need should be relatively painless.

Photo by Daniel Y Go

Whether you are taking out a loan or filing for bankruptcy, you will quickly find yourself in a crash course on he subject. But by knowing about secured and unsecured debt before you absolutely have to, there is a better chance that you can avoid many of the financial mistakes made by those who don’t understand either or their relationship to one another.

What is Secured Debt?

Secured debt is surprisingly easy to understand. Essentially, secured debts are debts that are tied to your ownership of some property. Should you default on repaying a secured debt, the lender will have recourse in the form of seizing the property to which you debt was linked. Mortgages are outstanding examples of secured debts because if you can’t repay the loan, the bank that provided the loan can take possession of your house. Other examples of secured debts are loans for the purchase of automobile or even a line of credit to purchase furniture.

What is Unsecured Debt?

Unsecured debt can best be described as the practice of walking a tightrope without a safety net. If you fall, there’s nothing to catch you. From the perspective of a lender offering unsecured debt, this is the best analogy to describe their risk. Basically, anyone who defaults during repayment has no tangible possession to forfeit in return.

Credit cards are a great example of unsecured debt. That is, no collateral is linked to the debt. However, many lenders are beginning to require new cardholders to sign a security agreement that, in the fine print, outlines that your property could be claimed as collateral if the credit card ever falls into default status.

Assessing Unsecured vs. Secured Debt

When taking inventory of personal debt or estimating what you can still afford to borrow, it’s essential to understand the difference between secured and unsecured debt. Some basic pointers:

• Thoroughly inform yourself about any loan you obtain (secured or unsecured). Read the fine print and understand the terms you are agreeing to.

• Don’t forget that secured debt is a loan backed by collateral. What you buy from borrowing could end up belonging to your lender (possibly along with other possessions) if you default on your loan payments.

• Credit card debt and other revolving charge accounts are primary examples of unsecured debt.

• Secured loans often have lower interest rates than unsecured debt.

Ultimately, regardless of your financial situation – strong or shaky – knowing what types of debt you have already accrued and understanding those that you may acquire is an imperative component of lasting solvency and learning how to properly manage debt.

Photo by daveybot

First, let’s define a secured loan.

A secured loan is a loan backed by collateral, which is a property pledge to insure repayment of a debt. The bank or other lender puts a lien on a piece of property equal or greater in value than the loan.

For instance, in the case of a car loan or mortgage, the car or house is the collateral. In other cases, a borrower puts their house up as collateral in order to get cash for home improvements, furniture, or even to pay off other debt. This is a called a Home Equity Loan or a Home Equity Line of Credit.

While a lender may not be willing to lend such large amounts of money through an unsecured personal loan, a secured loan decreases the risk to the lender. It sounds like the perfect solution to buying a new car, new home,  investment property, or even your child’s uni fees.

People often get secured loans for:

- Houses (in the form of a mortgage)
- Cars and other vehicles
- Certain business equipment, such as farm equipment
- Land
- Home improvements
- To pay off non-secured debt

Benefits to Secured Loans

Secured loans, because they are a lower risk to the lender, typically have much lower interest rates than personal bank loans. For someone carrying a lot of high-interest credit card debt, a home equity loan can consolidate credit card debt into one easy home equity loan that is paid every month.

Unlike the minimum payments on credit cards, a home equity loan payment does not change each month. The borrower will see their debt go down with each payment, and know there is a definite end to the loan. For many people, a home equity loan provides a way out of debt. For some, it seems to be the only way.

Drawbacks to Secured Loans

A secured loan protects the lender, but can put the borrower at great risk. In today’s economy, largely sparked by the mortgage crisis in the U.S., lenders all over the world (including Australia!) have become more conservative. They hesitate to give even secured loans to borrowers who don’t have a good credit history and can’t show the means to pay the loan.

Certain types of secured loans pose a greater risk than others, including:

- Debt Consolidation Loans
- Interest-only mortgages
- “Honeymoon” (Introductory) rate mortgages
- Split-rate mortgages
- Car Loans

Whatever type of loan, whether it’s a car loan, mortgage or debt loan, the risk to a secured loan is that if the borrower can’t pay, he loses the collateral. In the event of a car loan, failure to make payments can result in re-possession of the vehicle. If the vehicle is worth less than the amount of the loan, the borrower may lose their car and still owe the bank money.

In the event of non-payment of a mortgage or a home equity line of credit, a borrower may lose his house to foreclosure.

The greatest risk exists when someone takes out a home equity loan or line of credit against their house to pay off non-secured debt. With credit cards paid off, the borrower may begin using them again, creating an endless cycle of debt. As minimum payments on the cards grow larger, the borrower may not be able to pay his home equity loan, either.

Using your home as collateral to pay off debt may seem like a smart choice, but be careful. If it is the first step to a debt-free lifestyle, be sure to stay on that path.

Be careful with secured loans. They may seem like a good idea to get out of debt, but think about the collateral at stake if you can’t afford to pay.

Photo by benprks