Borrowing is one of the solutions to help you purchase the items you need, and banks offer a variety of ways to borrow money. There are some important questions to ask yourself before doing so:
- Do you need to spend the money?
- Are there other ways of financing your purchase?
- Can you afford to pay back the money you are planning to borrow?
Once you have decided, you may wish to become familiar with the following types of credit.
1. Secured loans
Secured loans are loans that are backed by an asset, like a house in the case of a home loan or a car with an auto loan.
Some of the important features to remember are:
- When you agree to the loan, you agree that the lender can repossess the collateral if you do not repay the loan as agreed.
- Because secured loans are backed by assets, lenders have lower risk in extending a loan to you.
- Secured loans also allow borrowers to get approved for higher loan limits. Even though you may qualify for a larger loan, exercise caution in choosing a loan that you can afford.
- When you are choosing secured loans, make sure you pay attention to the interest rate, repayment period, and monthly payment amount.
2. Unsecured loans
Unsecured loans are approved without the need for an asset as collateral.
Some important features are:
- You typically need to have a good credit history and regular income to get an unsecured loan.
- Loan amounts may be smaller since the lender does not have any collateral if you are unable to repay the loan.
- Personal loans are examples of unsecured loans because these are not tied to any asset (like a house or a car) that the lender can take if you are not able to repay the loan.
3. Overdrafts
An overdraft allows you to continue withdrawing money even if your account has no funds in it or not enough to cover the withdrawal.
Some of its features are:
- There needs to be an agreement with your bank first for an overdraft.
- It allows you to access additional funds when you need them or in case of an unexpected situation.
- If the amount of money you withdraw is within the authorized limit, then interest is normally charged at an agreed rate. If you exceed the limit, penalty interests are applicable.