Learn More About Loans

Loans are a helpful option to have on hand if you happen to come across a sudden short-term financial challenge. Not many Americans have the luxury of having thousands of dollars saved up, which is why personal loans and other types of loans can bring relief to a strained financial situation. However, borrowers should always tread cautiously when taking on loans as they can easily turn into an unwanted debt load that can be difficult to shoulder.

Types of Loans

There are many different kinds of loans available to consumers — some that require the funds to be used toward a specific purpose and some that don’t hold any restrictions as to how borrowers spend the money.

Student Loans

Personal Loans: Personal loans are a last-resort option for consumers who need a significant amount of funds in a short period of time. An example of when this may come up is if you find that you need to pay for an emergency surgery for your dog, but don’t get paid until five days later.

In this case, a $1,000 personal loan may be a way to help you over the hump, until you can repay the loan back a few days later. These kinds of personal loans are sometimes called signature loans or payday advance loans.

Student Loans: Student loans play a major role for many Americans attending higher education. These loans can be found through the government via subsidized and unsubsidized federal student loans or through a private student loan from a bank or credit union.

With college tuition rising and funding for scholarships and grants dwindling, taking out personal student loans are a reality for millions of students across the country.

Why are Interest Rates on Loans so High?

When comparing interest rates between personal loans (except for federal student loans which are at a lower interest rate) versus other loans like auto loans and mortgage loans, borrowers are often astounded to find how high they can get. Presently, there is no single loan rate that applies to personal loans and student loans across the board, as interest rates vary from lender to lender.

There are a couple reasons for the high interest rates attached to loans, which include:

Personal Loans

Collateral-Free Lending: Most personal loans and student loans do not require borrowers to provide collateral. Collateral something that borrowers promise to the lender as a way of securing that repayment will, in fact, happen. Personal loans are usually “unsecured” loans, which don’t require this promise; as a result, lenders increase the interest rates on loans to ensure they get money back in return for the loan sooner than later.

Fast Cash: Unsecured loans are very easy to obtain through methods like payday advance lenders, and the process of applying for loans is fairly quick. Consumers who end up taking loans of this nature are thus paying the price for the convenience of fewer hoops to jump through in order to obtain funds.

Dangers of Loans

Loans can take borrowers down an unending rabbit hole of debt, if they are not used wisely. In addition to the high interest rates on personal loans and private student loans, lenders sometimes impose an additional fee on consumers based on the amount being borrowed.

A $2,000 loan, for instance, may have a $10 per $100 borrowed fee, which results in an additional $200 due on top of the principal $1,000 amount, plus interest charges of about 20 percent.

When considering loans, it’s important to make sure that you have no other viable options and that you have the ability to repay the loan as soon as possible without floundering financially in the end.

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Whether you are applying for a student loan, a mortgage, or an auto loan, it pays to shop around for the best interest rates available to you. Before you sign on the dotted line with your bank, check with the local credit union, your auto dealership, or even the federal government. If you are a first-time home buyer or meet certain income qualifications for student loans, you may be surprised to find that there is a federal loan program offering low interest rates to borrowers exactly like you.

You should also check your credit report, which is one of the main tools lenders use to compare you to other borrowers. In 2005, the federal Fair Credit Reporting Act (FCRA) mandated that consumers were entitled to one free credit report a year from the three credit bureaus. If you want to qualify for the best interest rates on a loan, it pays to get your free credit report and make sure you have the highest credit score possible.

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