At the moment there is quite a bit of economic uncertainty in the world. In the US a lot of people have lost their jobs or had their working hours reduced significantly. The number of unemployed Americans is at the highest rate it’s been in recent times. Due to this, many people are experiencing financial hardship and a lot require loans to keep their heads above water.
There are several loan options available, depending on your specific needs and situation. However, each type of loan should be considered carefully and in detail because each comes with particular pros and cons. For example, some loans are easily and quickly approved but come with a significant amount of risk, as they have very high interest and high default rates.
Certain loans are aimed at those with bad credit and others are more suitable people who are financially responsible and have a history of paying their debts on time. Below we’ll look at some features of a few types of personal loans and compare them against a title loan.
Signature loans, sometimes known as a “good character loan”, are unsecured loans, and are called such because they are guaranteed only by the signature of the borrower. There is no collateral for the lender to recover if the borrower defaults on the loan.
Because the loan is guaranteed only by the signature of the borrower, it is usually required that the borrower has an excellent credit history and can prove that they have a regular source of income to repay the loan.
As with many other personal loans, the amount of money you will be approved for is determined by many factors, including your credit history, amount of income, and term of the loan.
Installment loans refer to a broad category of loans. Essentially, an installment loan is any loan that involves a regular repayment schedule and usually a fixed rate of interest. Each “installment” includes a portion of the principal in addition to the agreed interest rate. The amount of each installment is determined by the amount of the loan, the period over which the loan is borrowed for and the agreed interest rate.
Who are installment loans suitable for?
Installment loans are suitable for individuals who have a steady and consistent source of income. This is because you will need to prove that you’ll be able to repay each installment on time and in full over the term of the loan. Generally, installment loans are a good option for people with a regular source of income because the fixed interest rate allows them to account for the repayment of the loan in their monthly budget.
The fixed interest rate can sometimes be a disadvantage for borrowers. For example, if interest rates are lowered, borrowers of fixed-rate installment loans will continue to repay the loan at a higher rate. However, where interest rates rise, borrowers will still pay at the lower rate.
The type of finance available with credit cards is also called revolving credit. With a credit card, the borrower will have access to a fixed amount. However, they do not have to use the entire amount that is available to them. For example, you might have access to $500 per month, but only spend $100 on your credit card. Therefore, you’ll only have to pay back the $100, plus the interest on that amount.
If used responsibly, a credit card can be a useful tool. Many people keep a credit card that they use in case of emergencies. To prevent the accumulation of interest and fees, credit card balances should be paid on time and in full (usually at the end of the month). Most credit cards are unsecured, meaning there is no physical collateral that the lender can seize if the borrower fails to pay the balance owing.
Who are credit cards suitable for?
In general credit cards are suitable for individuals with a good credit score, who have a reliable source of income and are financially responsible. However, sometimes secured credit cards may be offered to individuals with a bad credit history.
It is important to know the interest rate applied to the credit card and understand how it accumulates. While some credit cards have an initial 0% interest rates and even offer rewards, other credit cards have higher interest rates. Ensure that you read the credit card agreement carefully before taking on credit card debt. While credit cards seem like an easy way to access personal finance, many people get into financial trouble as they spend the money on the credit card like it is their own.
Another common type of unsecured personal loan is the payday loan. A payday loan is a short term loan that is guaranteed using the borrower’s future paycheck.
Payday loans have become notorious and for good reason. These types of loans typically have extremely high-interest rates. Some payday loans have annual percentage rates or APRs of 400 to 1000 percent! Payday loans are also subject to additional fees, sometimes which can be quite high.
Some payday lenders also have bad reputations. In many cases, they are known for using aggressive collection practices when the borrower is late with their repayment.
Who are payday loans suitable for?
Payday loans might be suitable for individuals who have a regular source of income but have a bad credit history and are unable to secure finance from a traditional bank or lender. Borrowers should be very careful when considering applying for a payday loan. As mentioned above, the interest rates tend to be extremely high. If you are considering a payday loan, you’ll need to take care when reading the terms and conditions. Ensure you’re in a position to repay the loan plus the interest on-time and in full.
Additionally, look for any hidden fees which may not be apparent upfront. If you fail to repay a payday loan, lenders are known to be quite unreasonable and aggressive, so beware before signing up for this kind of loan.
What is a title loan and who is it suitable for?
A title loan is a type of short term loan. A title loan uses the borrower’s car as security for the loan. This works by the lender taking the ownership of the car for the duration of the loan.
Title loans are suitable for people who have a bad credit history. If you have a bad credit score, it is usually very difficult to secure a loan from a bank. In the event you are offered a bank loan, the interest rate may be too high.
Unlike banks, title loan lenders do not take the credit history of the applicant into account. A lender will not perform a credit check prior to approving a loan.
There are a number of requirements you must meet before you’ll be eligible for a title loan.
First, it goes without saying that you’ll need a car to be eligible to be approved for a title loan. Some lenders will require that you own the car outright and in full. Other lenders do not mind if you have outstanding payments on your car loan.
Secondly, most title lenders will require proof that the borrower has a source of income that will cover the repayments. Unlike a bank, however, this income usually does not have to be from employment. Most lenders will be satisfied if the borrower receives a government subsidy, such as a disability or unemployment benefits.
Some lenders will also request to inspect a borrower’s car before approving the loan. They may do this to check for damage to the car or anything else that might impact the resale value of the car.
Before driving away with your loan, most lenders will take a copy of the keys which will act as security in the event of default. Other lenders have been known to place a GPS device on the borrower’s car or in some circumstances a special device that disables the car where the borrower fails to repay the loan in full.
Title loans are considered quite a high risk for borrowers.
High monthly interest rates
The first risk to consider is that a title loan is relatively expensive. Typically a title loan will have an annual percentage rate (APR) of about 300 percent. This is considered very high. A loan with an APR of 300 percent will mean that a borrower would pay three times the amount of the loan back in interest after one year. However, title loans are short term loans and usually are required to be repaid after a term of about 30 days. This means that every month, a borrower who has taken out a loan with 300 percent APR, will pay about 25 percent in interest. For example, if you take out a loan of $2000, you would owe $500 in interest at the end of the 30 days.
The high fees applied to title loans are also a risk you should consider when thinking about applying for such a loan. Sometimes lenders may apply a host of fees for various reasons. One of the most common fees is for late payments. Before signing the loan agreement make sure you are aware of all the fees that may potentially apply. You can do this by carefully reading the contract before signing it.
Many borrowers are caught off guard by high fees because they haven’t bothered to read the terms and conditions. Don’t let this happen to you. A lot of the time borrowers are not in a position to repay the loan in full because they have mistakenly forgotten to take the additional fees into account. These fees are often quite significant and could be the difference between being able to pay the loan back on time and defaulting.
Risk of losing your car
As discussed above, in order to qualify for a title loan you supply your car as security. If you are not in a position to repay your loan, you may end up losing your car. Where you can’t meet your repayments the lender might repossess your car. According to statistics available relating to car title loans, 20 percent of borrowers end up losing their cars because they are unable to repay the loan. This means that if you take out a car title loan, you’ll have a one in five chance that the lender will repossess your car.
Risk of compounding interest and fees
A lot of lenders are willing to allow borrowers to take out a second consecutive loan if they are unable to repay after the initial term. However, this is beneficial for the lender and potentially detrimental to the borrower. Where the lender allows the loan to roll over for an extended time, the interest payable will likely double. Let’s take the example we looked at above. If you’ve taken out a loan for $2000 with a monthly interest rate of 25 percent, the interest payable to the lender at the end of 60 days will be $1000! This means that you’ll have to pay $3000 back instead of the original loan of $2000. This is one of the primary reasons that so many borrowers are at risk of defaulting on their loans — see more details from AARP here.
There are plenty of loans on the market depending on your profile. Each comes with its own set of risks and benefits. Some personal loans have lower interest rates, however, they may not be available if you do not have a good credit history. Additionally, credit cards might be quite a good option if you are a responsible spender. However, they may pose a risk if you tend to overspend or not keep a close eye on your finances and where your money is being spent.
For a lot of people having a rolling credit alternative leads to its own set of problems. A title loan may be a viable option if you’ve obtained a negative credit score. This type of loan should only be considered if you are 100 percent certain that you will have enough money to cover the cost of the repayment at the end of the period.