Are you in need of money?
We all have different reasons to earn. But one sure thing is, money earned today is more valuable than getting money tomorrow. That’s why lenders add interest to any amount you borrow.
But it’s not just to minimize risk. Money can solve problems fast. It can also accelerate your financial wealth, so you don’t have to waste saving dollars for months.
If you’re already making money or have a great financial history, chances are your time is more valuable than your earning ability. It makes total sense to borrow, even if you pay a bit more to access that money today.
Loans can be great if:
- You have cash-flow problems but already make money
- You want to save time on big purchases
- You want to live in your dream home without having to save up for years
- Or you simply want to have more money today. Because you have to repay, loans can motivate you to earn more (if you can manage debt well)
But because lenders can’t lend to any random person, they’ve set some conditions to reduce their risk. These may or may not benefit you depending on the loan you select. But if you choose well, we can guarantee you will get the most value for a loan.
What options do we have?
Your credit score or collateral defines how much you can borrow and for how long. The easiest way to afford these loans is to borrow a little for longer periods of time.
It may look like you’re paying less because monthly payments are smaller. But your interest rates will increase when you increase the loan term.
Interest rates look smaller for larger loans such as mortgages, but generally, the more you borrow, the more expensive it is.
There’s a common trick to increase the loan term — which is refinancing, or paying your loan with another one.
Keep in mind that lenders prefer you to pay the interest first and then the principal. If you restart the loan, you also restart the interest charges. And you still haven’t contributed anything to the actual loan.
To learn more about the pros and cons of refinancing, check this guide.
Depending on the loan purpose, some will allow different terms. The biggest ones allow up to 30 years, while payday loans and similar only last a month at most.
Even with great credit and a small term, it’s still not enough to know your interest.
Adjustable/Fixed Interest Rates
Due to the complexity, nobody really knows how interest rates work. But everybody has a simple idea of what kind of rates are fair.
Whether you believe the rates will go up or down, you will either choose fixed or adjustable rates.
If you think rates can go in your favor, you choose Adjustable Interest.
Now, all loans start at a fixed rate. But the adjustable ones will change after the initial period (5-12 months).
If the credit market suggests a lower rate, you pay less. But if it turns out to be the contrary, pay more.
Because nobody can accurately predict those changes, it feels safe to go with the fixed interest rate. But that’s not smart either, because lends always set them a bit higher than the average.
For large purchases, Adjustable may be too risky. But for smaller ones, it’s worth considering.
You will never pay way too much because most loans have a limit to how much their rates can change per year. Otherwise, it could be a personal loan scam.
Types Of Loans
You have plenty of options when it comes to borrowing money. So whenever you feel like you’re short in cash, you can be sure some of these will be right for you.
You will find many variations depending on the loan purpose. But all of them derive from a few simple questions:
- As a lender, how can I reduce the risk of losing my money?
- How much do I want to borrow, and for how long?
- What interest rate makes sense for my situation?
Let’s talk about the risk variable first.
Typically, all your lenders will look at your credit score, which shows your likelihood of paying them back. A high score means you manage your finances well, so you deserve to borrow more money at fair rates.
It also means low-score individuals have worse offers. And sometimes, your credit score may sink for years due to dumb mistakes, such as forgetting a payment.
If lenders only looked at your score, they’d be missing a lot of opportunities with the other group, which needs money the most. But because it’s risky, those borrowers need to make a better offer.
With secured loans, lenders are willing to offer money to anybody in exchange for an asset. The same concept applies to secured credit cards, where you need to maintain a minimum balance to use the card.
So you offer the lender a car, a house, or any other valuable as collateral for the loan. It allows you to lower the loan cost and interest rates, even with terrible credit. But if you can’t pay back the loan, you lose your asset.
If you pay on time, you get it back.
Unsecured loans, by contrast, rely on your financial background: your credit score, your work history, and your income reports.
Because secured loans are riskier, you want to make sure you can pay back on time. When borrowing large amounts, everyone will recommend unsecured loans.
But the risk also depends on the amount you borrow, and how long you keep it.
You may wonder:
“What combination is the right one for me?”
You can always customize when choosing a personal loan. But for most purposes, lenders already know which conditions work better.
For a lower borrowing limit, you can get money to spend it however you want. You can choose how much and how long to keep it. The interest rate will depend on your credit score.
It’s riskier for lenders to lend money without a purpose, so you may need a higher credit score to qualify.
You have three choices:
- Ask for a loan to your bank
- Contact and compare different private lenders
- Use your credit
The easiest way to borrow is by using your credit lines. As your credit score increases, you can borrow greater amounts and ask for longer terms. But to get there, you need to take care of your history:
- Have multiple credit lines (10+)
- Have 5-7 years of credit history length
- Never miss any payments
- Make fewer hard inquiries per year
- Keep your utilization rate low
There’s a lot more going into it. Here’s a quick but powerful strategy to improve your credit score.
Because these loans target low-income groups, lenders offer more flexible terms to their borrowers. You can borrow as much as your college tuition costs, and you don’t need to repay until six months after graduation.
The downside is, they keep accruing interest since the very first day of the semester. You can choose to pay it on time, or you can wait until it adds up to the principal. Which is FAR more expensive.
Student loans can be subsidized or unsubsidized. The difference is, you don’t pay for the accrued interest in the former one. And the problem? Fewer students can qualify for them.
No matter what you owe, you can be sure the amount won’t change. All student loans use fixed rates with a generous repayment term. And even if you don’t have a credit score, you don’t need to secure these loans.
Not everybody has $100Ks in their pocket. But that doesn’t mean you can’t get the house you want. It will just cost a bit more than if you paid in full.
Mortgage lenders give you many mortgage options to afford a home: 15/30-year plans, fixed/adjustable rates, even collateral options. Which one you choose depends on your credit score.
Depending on your situation, you may qualify for special categories: USDA, VA, FHA, or reverse mortgages. So you can even buy a house with bad credit.
But no matter which one you choose, make sure that:
- You negotiate the best price for the house
- You account for the closing costs of the property
You can choose to lower monthly payments if you increase your downpayment. Remember to save some money for the house after you get the agreement.
If you can’t afford the house because of bad credit, you might want to save for the purchase while you rent the property (AKA leasing).
Business loans are a brilliant idea to support a business that’s already making money. But it’s NOT good that your business success depends on the loan’s money. No matter the funding and market research, nobody knows 100% if a business will work until you’re making money.
If that’s your only repayment plan, you may find a harsh reality. But if you have other income streams, then loans can accelerate your business growth.
For entrepreneurs, not doing business is more expensive than taking a loan. If you work on e-commerce, you may have high operational costs (e.g., inventory). And because of the demand spikes, it’s hard to predict the company’s cash-flow. Loans solve that problem.
Business is better than personal because you have higher spending limits. But interest rates may not be as beneficial. And most lenders require a personal guarantee, so any debt created by your business affects your personal credit score.
Entrepreneurs have a tough decision, whether to sacrifice cash-flow or reduce profit margins. Despite the low approval rate, lenders certainly prefer owners who are making money already.
If you own a physical business or commute to work, your car can be an investment. You can use it to travel faster or advertise your brand. That’s why getting the car first may help you pay for it faster.
If you can afford the full amount, it’s cheaper. Do it, end of the conversation. But if you can’t, it’s still worth borrowing:
- Leasing. If you don’t want to own the car, you can still use it for years and return it later. If the car has problems you didn’t cause, or you don’t like the model, you return it at the end.
You pay a fixed fee every month until you return it years later.
- Hire purchase. You keep up with recurrent payments, but the seller can repossess the car if you miss one. Only when you pay until the last one, you own the car.
- Personal Contract Plan (PCP). For an initial deposit, you can enjoy the car for a set time or mileage limit. At the end of the term, you can choose to buy it, return it, or exchange it for another one.
There’s no right answer here. But if you’re going to rent a used car, research the owner/dealership first and inspect the vehicle.
If you’re short in cash you can get a few hundred bucks instantly for a fee. All you need is:
- Your proof of income
- A checking account
To get this loan (maximum $500) you pay an upfront fee, which is around $50, never more than $100. You use this money to cover things like rent and utility bills.
The day you receive your paycheck, you must pay it back. Payday loans have three-digit APRs, so you don’t want to pay late.
Typically, low-income earners with low credit don’t make good decisions. So they get the payday loan, but when it’s time to repay, they don’t save enough. To avoid the late fees, you can renew your loan for the same amount you paid at first: $50 to $100.
If the wrong financial habits and a lot of bad luck, borrowers keep doing this for months until they end up paying more in fees than what they borrowed.
Payday loans are NOT a solution to money problems. That’s why you should get a second income stream. However, they are beneficial when your only problem is cash flow. If you KNOW you’ll have the money by that time, payday loans can save the month.
It’s still a short-term solution, so don’t use them too often.
The Bottom Line
Are loans borrower traps or convenient tools? The lender obviously wants the best terms, but they always reward responsible clients. If you prove you always pay them back, they see you as a lower risk, which gets you lower rates.
Regardless of the loan you choose, remember it’s not your money. If you don’t have a repayment plan already, it defeats the purpose of borrowing. Why would you want to get help only to end up with not enough money?