Loans can help consumers buy a house, purchase new cars, further education or start a business. Credit card loans offer funds to update wardrobes, buy household appliances and furnishings, pay for cosmetic dentistry or take fun-filled vacations.
While loans allow consumers to finance things they cannot afford to pay for upfront, borrowers must be able to repay debts. Otherwise, they will destroy their credit rating and potentially be forced into personal bankruptcy.
Prior to the economic recession, loans were fairly easy to obtain. Many lenders offered bad credit and ‘no credit check’ loans; making it simple to qualify for secured and unsecured loans. Today, lenders scrutinize borrowers to ensure they are financial capable of repaying borrowed funds.
Borrowers must weigh the advantages and disadvantages of obtaining any type of loan. All bank loans are assessed interest which increases the amount of money to be repaid. Lenders can also charge late fees when payments are delinquent.
If borrowers default on loans, banks can initiate legal action to collect outstanding loan balances. When creditor judgments are issued, borrowers are responsible for legal and court costs in addition to late payment penalties and accrued interest.
Loans financed through banks and credit unions are secured with a promissory note. This legal contract outlines payment terms, interest rate, late fees, and payment dates. Personal loans provided by family or friends should include a promissory note to ensure both parties understand the terms and prevent family disputes.
Interest rates are based on the type of loan provided. Other factors affecting interest rates include the borrower’s credit score, employment history and who is providing the financing. Individuals providing personal loans are required to abide by state usury laws and prohibited from charging a higher rate of interest than banks or credit unions.
Credit card companies usually charge the highest rate of interest with rates ranging between 9- and 23-percent. Home mortgage loans usually carry the lowest rate of interest with rates ranging between 4.5- to 7-percent.
Borrowers who obtain mortgage loans for bad credit pay a higher interest rate because they are considered high risk. High interest loans often set borrowers up for default which leads to foreclosure. Instead of taking out a high interest home loan borrowers should strive to clear derogatory credit and obtain a fico score of 720 or higher. Depending on the severity of credit damage, restoring credit can take a year or more.
Bad credit borrowers who want to buy a home might find lease-to-own or seller carry back mortgages are better options. Rent-to-own involves providing a down payment to the seller who contributes a portion of rent monies toward the home purchase. Seller carry back mortgages require sellers to act as a lender for all or part of the purchase price.
Borrowers who obtained bad credit mortgages and have cleared derogatory credit should consider refinancing mortgages. This option allows borrowers to reduce interest rates and lower monthly installments. Interest rates are based on credit scores, so the higher the score, the lower the rate of interest.
Mortgage refinancing can be a good option for homeowners with good credit. Property owners should strive to obtain a 2-percent interest reduction. Refinancing requires borrowers to pay upfront costs such as loan application fees, property inspections and appraisals, attorney fees, and closing costs.
Borrowers carrying multiple loans might benefit from loan consolidation. This financing option can be especially helpful for students with several college loans and homeowners with two or more mortgages. Consolidation loans can reduce overall interest and help borrowers pay off loans earlier than anticipated.