One cannot afford to go in for a loan just like that. There are a lot of factors to consider before putting yourself in an irreversible situation. You have to remember that once you put your signature on that contract, or at least after the usual 3 day grace period, there is no turning back. There are bound to be serious consequences if you find that you cannot repay your loan.
In general, the loan market is divided into secured and unsecured loans. A secured loan is usually taken out against collateral. The process of acquiring this kind of loan is much quicker especially for those who have bad credit history and low credit rating. Since there is already a tangible asset that can be defaulted to if the loan remains unpaid, finance institutions give much lower interest rates for secured loans.
However, in case of your inability to pay, the lender will take over your property. An unsecured loan on the other hand is usually given to people who have good credit history as well as high credit scores. As a result, it makes sense to go in for a secured loan.
However, just deciding whether to choose a secured or an unsecured loan is not enough; other factors must also be considered.
Interest Rate: Even if this is one of the most important details governing our decisions, you should not be blinded by faulty advertising. You could be enticed by low rates of interest, but this may not lead to savings for the duration of the loan may be longer. If the interest rate is reasonable compared to the loan term, then go ahead and sign those papers.
Loan Term: A lot of loans have fixed terms, usually 15, 20, 25 or at most 30 years. Some lenders will enable you to change the term, if they think you can pay the whole debt off within half the time. But be prepared to pay fees and penalties for early repayment in such a case. Ask your bank if they offer opportunities to pay them back earlier or later, and how the change will affect your interest rate as well as monthly payments.
Hidden Charges: Look through all the clauses before you sign the contract. There might be charges you are not aware of, especially for home equity mortgages. Make a list of all the extra fees and penalties that you might be required to pay.
Floating or Fixed Rates: If you availed of a fixed rate loan, then you know exactly how much you will be paying every month. Chances are your parents had a fixed rate loan on their first mortgage, because it was the only one available to them during their time. As time went on, things like the adjustable rate mortgage emerged on the scene.
This is also called an adjustable or flexible loan in some cases, as the interest rates vary annually or quarterly, depending on the terms of the loan. If you are lucky, the low interest rates in the market could help you to save a lot in terms of interest.
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