Consumer loans provide a simple way of accessing funds for personal needs and emergencies. The simplified process and quick disbursement make them very popular among several other funding options. Whether you are looking to buy a new car or TV or pay for an emergency, consumer loans are very effective in helping you resolve financial needs.
A consumer loan is a credit you can apply for to cover certain expenses. The loan can be unsecured or secured. It can also be offered by different financial institutions.
Categories of Consumer Loans
There are different categories of this credit. Here are some of them:
This category can be given to consumers to meet any purpose at a predetermined limit. The lender will set a limit or a specific date for the borrower to start making a repayment. Interest will be charged if the borrower fails to start repaying at the set time. A common example of an open-ended loan is a credit card.
Unlike its open-ended counterpart, this loan is given for specific purposes. Repayment of close-ended credit is paid in monthly installments. If you would like to know more about close-ended loans, read this article.
Forms of Consumer Loan
The following are the forms of this credit:
This loan is backed by collateral. Collateral is an asset that is used to cover the repayment of debt in the event of a default by the borrower. Secured loans will offer you more funds, a lower rate of interest, and a longer repayment time. Also, this loan takes note of your credit report and score.
Since this credit is backed by collateral, the risk a lender faces is reduced. For instance, if the borrower does not repay the debt, the lender will take possession of the collateral and sell it to cover the outstanding debt.
This is not backed by collateral. It also doesn’t place much emphasis on your credit score. Many unsecured credits are easy to get than secured ones. Generally, the credit offers limited financing amounts to borrowers, a high rate of interest, and a shorter repayment term.
As the credit is not collateral backed, the lender faces more risks. For instance, if a borrower fails to pay back, the financial institution might not be able to recover the debt.
How to Apply for a Consumer Loan
The following are some helpful steps you should follow when applying for this:
Step One: Ensure You Know How Much You Need
Remember that when you apply for a loan, you wouldn’t just repay the exact money you borrow; you would repay with interest. There is no reason to pay a rate of interest on money you don’t need, so borrow only what is needed. Also, do not take up a loan that is less than the amount you need. Examine your present situation and the amount needed to cover your expenses, and then borrow that amount.
Step Two: Know Your Financial Status
Ensure that you can afford to make payments on the money lent to you. There is nothing as bad as borrowing more than your financial capabilities. If your monthly income cannot help you cover your debt at the stipulated time, look for a cheaper alternative. Or you can create a budget that monitors your spending and allows you to repay your debt on time. If you would like to know how to create such a budget, check here: https://www.nerdwallet.com/
Step Three: Check your Credit Report
Many consumer loans rely on your creditworthiness. Make sure to check your report before applying for the loan. You can ask the appropriate reporting agencies for yours. Most agencies offer it for free. You are more likely to borrow funds with a better interest rate with a high credit score.
Step Four: Know Where to Obtain the Credit From
There are several organizations that can offer you a consumer loan. They can be divided into two categories: those with a banking license and those without one. Some of these organizations include:
Credit Unions and Banks
These organizations always have a banking license. They are governed by different regulatory authorities like the Federal Reserve among others. Credit unions and banks are one of the first places people go to when they want to borrow money. If you choose these places, you will have to meet the loan officer. This officer will ensure that your application process goes smoothly.
Unlike other options, banks tend to have higher qualification standards for their loan application. They might offer special incentives if you are already a customer. Credit union qualification procedures are less rigid than banks. However, you would have to be a member of the union before they accept your application.
Non-Banking Financial Institutions
These organizations are without a banking license, but they can offer loans to consumers. They are under certain regulatory authorities like the FINRA and SEC and are expected to protect the interest of people to whom they offer services.
The NFBIs include payday lenders, online financial companies, insurance firms, peer-to-peer lenders, and other non-banking organizations. These financial institutions charge a higher rate of interest than credit unions and banks, but they offer loans to you even when a bank cannot or would not. Some of these firms offer low-interest rates if your credit score is good.
Step Five: Check Your Eligibility
Is your financial profile eligible for a loan? Regardless of the place you choose to borrow money from, ensure that you know your eligibility. Determine if there is an income threshold or a required credit score for the loan you wish to apply for.
Step Six: Know the Important Details of the Lender
When choosing a firm to borrow from, there are certain factors to keep in mind. Here are some of them:
Does the lender include a prepayment penalty when offering a credit? This is quite important to consider. You wouldn’t want to pay a penalty for repaying your debt before the expected date. Some firms might offer a grace period to their customers if they default on repayment. Ensure that the lender you go offers such to its customers.
Does the firm offer billig lån (cheap loan) at a lower interest rate? Or does it include hidden fees in its total repayment amount? You need to consider this. Know the type of interest rate the lender offers. Is it variable or fixed? Calculate the expected amount you would repay at the end of the loan term.
Forms of the Loan
Does the firm offer unsecured or secured credit? Not all non-banking financial institutions offer secured loans, but many banks do. If you know you want a secured credit, ask your local bank if they offer one.
Will there be a compulsory automatic withdrawal of monthly payments of the loan or is it optional? If it is optional, will you get a low rate of interest if you accept an automatic withdrawal? Make sure you ask the lender these questions. Ensure that you get a repayment term that suits your needs and financial status.
Step Seven: Apply for the Loan
Once you have known some important details about the financing firm, the next thing to do is to apply for a loan. Ensure that you are satisfied with the rate of the interest and the terms and conditions of the firm you go for.
Some loans require some important documents and information from you. Some of them include:
- Your name
- Your current employment status
- An official ID card
- Social security number
After filling in these important details, you can submit your application. A reputable company will ensure that you receive the funds within 24 to 48 hours of application.
Getting a consumer loan is quite easy if you follow the right steps. Ensure that you follow the steps mentioned above before applying for one.