It is always an excellent idea to set aside cash for emergencies like medical bills or for major expenses such as a home, vehicle, or college education. However, creating an emergency fund can be challenging, especially when you live paycheck to paycheck or are still struggling to make ends meet. This necessitates taking a loan in case of an unanticipated bill. Read on for four types of loans you could take out to manage necessary expenses.
Table of Contents
1. Personal loans
A personal loan is the broadest loan type as it is not designed for a specific purpose. You could use a personal loan to cater to emergencies, vacations, medical treatment, weddings, moving, significant purchases, including computers and other costly electronics, home improvement, or consolidate your debts. Personal loans often have a repayment plan of 24 and 84 months. There are two types of personal loans:
a) Secured personal loans
These are loans that require some form of collateral. This means you have to offer a valuable possession, including your vehicle, title deed, or savings account, to secure a loan. If you fail to repay the loan within the set time frame, the lender can repossess the security.
b) Unsecured personal loans
An unsecured personal loan is backed by your signature and not collateral. To secure an unsecured loan, you must have a positive credit score. Since the lending companies take on more risks, you will incur a higher interest rate than secured personal loans.
2. Payday loans
These are short-term loans that often last until your next payday. A payday loan is not credit-based, so you do not need a positive credit score to secure the lender’s financing. Payday loans are an excellent solution for emergency expenses since most lending companies like My Canada Payday do not check your credit history to offer to finance, resulting in a fast approval process, sometimes within 24 hours.
However, payday loans charge significantly high finance fees, often 400% APR. Payday lending companies also allow you to roll over your loan if you cannot settle your debt within the specified time frame. While this may seem appealing initially, rolling over your payday loan attracts additional charges, increasing your debt burden, so you should ensure that you pay your loan by the due date.
3. Home equity loans
A home equity loan is a secured lender financing that allows you to borrow a lump sum of cash while using your home as collateral. You often borrow up to a specific percentage of your home equity, usually 85%, and have to repay the total amount within five to 30 years. A home equity loan is an excellent way to secure financing as you often enjoy low-interest rates because you borrow against your home. However, ensure that you budget for the loan repayment as the lending company could foreclosure your home if you default on payments.
4. Auto loans
An auto loan is a secured loan whereby car dealership companies, banks, credit unions, and online lenders help you finance a new or used vehicle purchase. The car becomes the collateral, and if you fail to repay your loan within three to seven years, the lending company can repossess the vehicle.
Endnote
Loans help you achieve goals that you could not otherwise afford. Familiarize yourself with the above loan types to pick the best lender financing suitable for your needs.
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