Unsecured Loans – The Safest Loan Scheme For You
Many consumers opt for an unsecured loan because they are quick to arrange, the interest rate is reasonable, you do not need collateral to post against the loan and repayment terms can be arranged from 6 months to five years at most lending institutions. These loans are utilized for many different purposes. They are used to consolidate debt, to pay for home upgrades, to pay for trips and just about anything else that you can think of. Unsecured loans are one of the safest loan schemes for you and many consumers who need extra money to help them achieve their objectives and manage their cash flow. A longer term unsecured loan will have a lower monthly payment and in most cases will be easily affordable.
What is the difference between an Unsecured and Secured Loan
As we mentioned earlier a consumer does not need to put up any kind of collateral for their unsecured loan. Many people consider car loans to be unsecured, however the loan companies and the auto companies will almost always offer loans for their products at very low interest rates to secure sales. The car you buy will be the security for the loan, so your car loan is actually a secured loan and not an unsecured loan. If you do not meet all of your payment requirement, the buyer risks losing his or her car. The car will be repossessed by the lender for nonpayment and then resold to recover what is owed to the lender. In addition there would be repossession fees and administration fees, so you could still owe some money to the lender even after your car has been repossessed or sold.
If you actually were able to obtain an unsecured loan to purchase the car the lender has no claim to your car or anything else you own without taking you to court to gain a judgment against you. This may sound a bit harsh; however this is really the best way to illustrate the difference between these two types of loans. The other difference is that a secured loan will usually have a lower interest rate than the unsecured loan, which saves you money in the long run. This reflects the reduced risk for the lender when lending money in this manner.
Why Would You Use an Unsecured Loan to Consolidate Debt
The most obvious situation to use an unsecured loan to consolidate debt is when you have a number of credit cards with unpaid balances that are have an interest rate of 18% or higher on those unpaid balances. Depending on your credit rating, consumers can usually obtain a personal loan at least 6 points below the standard credit card rate. This significant difference will result in a huge interest savings even if you take the full term to repay the loan. The lending rate changes from time to time and many also be different for consumers with poor credit ratings vs. those with excellent credit ratings.
Consumers who take these savings and apply them against the principal of the loan will find that they can also repay the loan much more quickly than they would otherwise. Let’s use an example to illustrate. A consumer has three credit cards all at the maximum of $5000, for a total of $15,000 in debt with three payments of $119.79 per month or $359.36 per month in total, assuming 18%. The total interest paid will be $6861.21, which is quite a lot of interest to pay over a period of 5 years. It also assumes that no additional charges are made to the credit card over the five years to keep the example simple. We know that this is probably not realistic but we wanted to keep the example as simple as possible.
With an unsecured loan at 12%, which is still quite high, the payment is reduced to $321.77 per month, which is a $40 a month savings and the total interest paid is $4574.14, a $2300 savings in total interest paid. If the unsecured loan was procured at a lower rate the savings associated with debt consolidation would be even higher. When consumers are shopping for a loan, they may want to consider using a broker to find them the lowest rate possible to save as much money as they can.
Brokers make it their business to be aware of what interest rates and terms various lenders are charging for all kinds of loans and mortgages. In addition once a lender begins working with a broker, they may also provide them with special programs when they bring qualified lenders to them. The broker is paid a finder’s fee by the lender each time they bring a qualified customer to them so there is no additional fee for the customer. This approach can be a great way to find the best rates and terms for personal loans. In addition, customers can compare these rates with a quotation they might be able to obtain from their own bank and chose the one that makes the most sense for them financially.
Consumers should also be aware that a personal loan with a short amortization will have the lowest cost in terms of total interest paid, however the monthly payments are going to be larger because of the short duration of the loan. Longer term personal loans will have a lower monthly payment, however the total interest paid on the loan is going to be higher as well. It is a trade off that each consumer must consider when borrowing money from any lender. They need to make sure that they can afford to pay the monthly payments along with all of their other debt payments, utility bills and regular living expenses.
A short term loan might have too high a payment to be able to afford, while a personal loan with five or more years amortization will be much more affordable from a cash flow perspective. Balancing your cash flow is very important since it means that you can meet all of your commitments and avoid any delayed or even delinquent payments. Any of these issues could have an effect on your credit rating making it more expensive when borrowing money.
Unsecured loans can be utilized for many purposes and consumers should always pay attention to the rates they pay to ensure they save as much money as they can to be used for other purposes. A secured loan can reduce your interest costs even further and this could be another option to consider when applying for a loan.