Risk vs. Reward: Examining Different Loan Types
Any time you take out a loan, both you and the lender are taking a risk. The lender is taking a risk by providing you with money with the understanding that you will repay it, and you are taking a risk that nothing will happen to prevent you from repaying that loan on time. Here, you’ll learn about some of the most popular loan types and the risks they present to you.
A home loan is quite possibly the largest loan you’ll ever take out, and it’s also one of the riskiest. That’s why so many lenders rely so heavily on your credit history. You’ll need to have excellent credit, solid employment, and a good debt-to-income ratio before a lender will even consider your application. Although you’ll enjoy the benefits of homeownership, getting behind on your payments can be traumatic. Banks can foreclose on a home after only a few missed payments, which leaves you high and dry – even if you sank your life’s savings into the down payment. What’s more, foreclosure can have a serious impact on your credit history, and it’s tough to recover.
Car loans aren’t as large as home loans, but they can be just as risky. You may take out an auto loan from your personal bank, or the company selling you the car may finance it through their own bank. Your best option is to shop around for your own loan; any lender the dealership uses will be looking out for that dealer’s best interest and not yours. What’s more, shopping around can help you get the best interest rates, which can save you thousands of pounds over the course of your loan.
Should you default on your auto loan, you may be able to set up payment arrangements so you can get caught up again. If you get too far behind, though, things can take a turn for the worst. If you financed your car through the dealer, the dealer can repossess it, keep everything you’ve paid up to that point, and resell the car to someone else. If you financed through your bank, the bank can take possession of it and sell it to recoup its losses.
Personal Loans from Banks
The risk associated with a personal loan from your bank is lesser than that of a home or vehicle loan, and the risk increases with the length of the repayment term as well as the size of your monthly payment. The longer you’ll pay on the loan, the more the chance that something unexpected will prevent you from repaying it as promised. If the monthly payment amount is high, then the odds that you’ll have trouble affording it will also increase. If you choose to take a personal loan from your bank, make sure you carefully consider the repayment terms and the amount of the monthly payment. Your bank could sue you if you default, and this can result in garnished wages.
Short-Term & Payday Loans
Short-term loans, sometimes called payday loans, present a great deal of risk. Although they are easy enough to obtain – even if you have limited or poor credit – the interest rates associated with them cause significant issues for many borrowers. For example, lenders may require you to repay as much as £350 for a £275 loan, which is an additional £75. If you cannot repay that loan on time, which is usually within 14 to 30 days, you’ll be charged a late penalty and even more interest. Many borrowers can find themselves in cycles of endless debt, so be sure you’ve carefully weighed your options before you go this route.
V5 loans can be another great source of money, but it’s important to consider the implications. If you for example were looking for logbook loans in Liverpool it would be like refinancing your car, for the most part, but at a higher interest rate than a traditional lender would offer. The advantage is that people who have challenged credit can often get approved (though it isn’t guaranteed), and lenders try to make up for this additional risk with higher interest rates. Should you default on this type of loan, the lender reserves the right to take possession of your car and sell it to recoup its losses.
When you put up collateral to take out a loan, this is called a secured loan. Pawning a possession is a good example of a secured loan, though credit cards and even bank loans may also be secured. You give your item of value (or the deed to that item of value) to the lender in exchange for money. When you repay the loan in full, you get your item or deed back. Should you fail to repay that loan as promised, the lender gets to keep the item, and you may still be charged some fees. Secured credit cards, on the other hand, require an up-front cash deposit from the borrower.
Credit cards are also types of loans. In this case, a lender provides you with a revolving line of credit that you can use and reuse according to your payments. For example, if your credit limit is £700 and you spend £300, you still have £400 in credit available to you. If you make a payment for £100 plus any applicable interest, you will then have £500 in credit available to you. Should you default on credit card payments, your lender can take many different actions. It might increase your interest rate and apply exorbitant late fees. If you default for a long period, you will impact your credit history and you may be ordered to repay the debt via the court. In some cases, the court may garnish your wages.
As you can see, there is some risk associated with every type of loan you can think of, whether it’s a small loan for just a couple hundred pounds or a huge loan to buy a house. Be sure that you take the time to consider the risk and rewards before you make a rushed choice; getting behind could cause you to become overwhelmed with debt.