Most people seem not to know the borrowing basics and consider all loans to be the same. However, this is absolutely not true.
If you are new to this world of borrowing and debts, you should know the borrowing basics so that you do not take out a loan that is not necessary whether it is for consolidating your previous ones or otherwise.
This knowledge will make you a smart credit shopper and therefore you will not be at the mercy of the lenders or will be taken for a ride by them. It will pay you handsomely if you have the have knowledge of all the available options and shop prudently to compare the loans, the interest rates as well as the repayment terms.
Basics of borrowing and beyond
Your knowledge should start right from the basics. In this broad and varied finance market, there are different types of loans available for you to take out and all will have its signature pros and cons, terms and conditions, usefulness and purpose.
- A secured home loan or mortgage is considered to be the one of the better forms of loan. This is because the value of the house will increase over time therefore making your loan productive. Apart from that, when you take on a home loan the amount that you pay as interest on the loan is usually considered to be tax deductible making it further productive and high yielding.
- A student loan on the other hand, is another type of loan that is considered to be better and productive because all educated workers usually tend to earn higher wages in their professional career in the later stages. This once again makes this loan a productive one irrespective of the fact that it is unsecured. However, in this aspect it is assumed that you earn a better degree through your education and successfully are able to use it to get hold of a more lucrative job.
- If you have a consumer debt on other hand such as credit card balances or even a car loan for that matter wherein the former is an unsecured loan and the latter is a secured loan, both of these loan types are considered to be unproductive as both do not have anything that will gain in value over time. Add to that, the fact that both these types of loans will carry a higher rate of interest in comparison to the home loan makes these loans far less favorable. Apart from that the interest that you pay on these loans are not considered as tax deductible.
That is why you will need to consider the type of loans and then select the unproductive ones to include them in your debt consolidation loan. However, for this purpose you are requested that just as you need to know the cost and benefits of the credit card debt before you use your credit card to make a purchase, it is good to know the pros and cons of debt consolidation as well by going through the debt consolidation reviews to make a well informed and educated decision.
Secured and unsecured loans
In the world of finance, the money lenders usually provide two specific types of loans to the borrowers: one is the secured loans and the other is the unsecured loans.
- The secured loans are those loans offered by the money lenders that are protected by any asset or property that you own in your name. In finance terms this is called the collateral security.
- On the other hand, if you take out a loan to make a purchase of any tangible assets such as a home of substantial value, the money lender will use this asset bought as the collateral for the loan offered.
- In this case the money lender will typically hold the title or deed of the asset till the time you repay them the full amount of the loan along with the interest at the predetermined rate within the predetermined time or tenure of the loan.
- The money lender may even insist you to add their name in the insurance policy for this specific period so that they get the reimbursement should anything untoward happen to the asset such as a fire within the loan term.
- These loans are typically called a secured loan because the collateral provides the money lenders with a sense of assurance and security that the balance will be paid by the borrower. In case you default or fail to pay the amount borrowed on time the money lender will confiscate the property and even sell it off in auction to recover the amount of money lent out to you.
It is for this reason that the money lenders loan out far less amount in comparison to the face value of the property so that they do not face any monetary loss while selling it off to recover their dues.
The unsecured loans on the other hand are much riskier than the secured loans as these are offered by the money lender without any collateral security of your car, house, apartment, condo and even your boat. Therefore, it is much difficult for the money lender to recover the money offered out to you in case you default or fail to repay the loan.
It is for this reason that the features of the unsecured loans are different as compared to the secured loans. The features of unsecured loans include:
- The amount lent out is smaller than a secured loan
- It carries a very high rate of interest than the secured loan
- The loan term or tenure is much less as compared to the secured loan
- The monthly bills of such loans are also very high.
It all depends on your creditworthiness which is evaluated by the money lender based on the credit reports and scores, your employment history, and your disposable income and several other factors as well.
Therefore, it is best to consolidate your unsecured and unproductive loans.