Category Archives: Loans

What is a Payday Loan?

A payday loan, which might also be called a “cash advance loan” or “check advance loan” is a short-term loan for a small amount, usually ranging from $100 to $1,500. Typically people take out these loans to fund expenses that are due and need to be paid off before their next paycheck arrives. In that situation, people borrow just enough money to get through to their next payday, which is when the loan is due.

Payday loan businesses may take postdated checks as their collateral in case you are unable to pay back what you borrowed. This means that the borrowers need to write a post-dated personal check in the amount they want to borrow, in addition to a fee for borrowing the cash. The lender immediately advances the customer funds, but holds onto the check and cashes it on the agreed upon date, which is usually on the borrower’s next payday.

Is a payday loan for you?

Most borrowers using payday loans have bad credit and low incomes. Many don’t have access to credit cards and take out these loans to avoid costly bounced checks, overdraft protection fees, and late bill payment penalties.

You can get this type of loan from a business that is not a bank, usually from a loan store. Generally these businesses charge a large fee for the loan, making the interest rate on the loan very high. The cost of the loan may range from $10 to $30 for every $100 borrowed. If the fee was $18 per $100 for seven days, this is equivalent to a rate of more than 900% on an annualized basis. By comparison, APRs on credit cards can range from about 12% – 30%.

Since payday loans charge a very high interest rate, it is advisable to see if you have other alternatives before taking out a payday loan. Increase your income by finding another job or cut down unnecessary expenses to free up your cash.

Read here on how to get a payday loan.

What happens if you don’t pay back a payday loan?

Before you take out a payday loan, it’s very important to fully understand the terms. Payday loans have high penalties because the lender is taking a large risk by lending to people without running credit checks. Different lenders have different approaches when you do not repay your payday loan on time. Some lenders will allow you to “roll it over” so that the loan is extended. Although you do not have to pay off your loan right away, fees will keep accumulating until you do. Lenders will continuously try to take the money from you until you are able to fully pay back what you owe. As soon as you have problems repaying your loan, talk to your payday lender and try to arrange a viable repayment plan.

It’s also a good idea to check whether your payday lender is a member of a trade body such as the Consumer Finance Association, the Finance and Leasing Association, the Consumer Credit Trade Association or the BCCA. Many of these associations have a charter where its members have to follow stringent rules, such as:

a) Tell borrowers how the loan works and the cost of the loan before they apply
b) Freeze interest and charges if they make repayments under an agreed and reasonable repayment

Debt collection
If you have not paid back your loan within a certain amount of time, the payday lender may pass your case onto a debt collection agency. This can be stressful as you are likely to start receiving a lot of letters, phone calls, and even home visits demanding the money.

Complain

If your payday lender is using aggressive debt collection practices, or you think you’re being unfairly treated, you can write a complaint stating why you think the lender is not adhering to the Office of Fair Trade’s irresponsible lending guidance. If you do not receive a satisfactory response within eight weeks, you can escalate your complaint to the free and independent Financial Ombudsman Service, which settles disputes between lenders and consumers.

What are Personal Loans?

As interest rates on credit cards increase to as high as 30%, people continue to look for alternatives to credit cards.  One such alternative is a personal loan, which is one of the many ways for an individual to borrow money. Generally, the borrower receives a lump sum payment from a lender and makes monthly payments to pay it off. There is a fixed payment and a fixed payment schedule.

Personal loans have a fixed amount.
Personal loans are usually small loans and can be used to finance anything, such as a car, renovations to a home, unexpected expenses, or a variety of other things.  The amount you are able to borrow for a personal loan can range anywhere from as low as $1000 to as high as $50,000. How much you are able to borrow depends on the lender and your credit rating. The better your credit score, the more money you can borrow for a personal loan.

Personal loans usually have a fixed interest rate.

Although some personal loans come with a variable interest rate that changes periodically, most personal loans have fixed interest rates. This means the interest rate is locked and doesn’t change for the term of the loan. Similar to the loan amount, interest rates on personal loans are dependent on your credit rating. The better your credit score is, the lower your interest rate will be.

Personal loans have a fixed repayment period.

A personal loan is typically a short term loan between one to five years. Repayment is a fixed amount of monthly installments over a set term. Longer repayment periods lower your monthly loan repayment, but they also mean that you pay more in interest for borrowing longer.

There are also two types of personal loans: unsecured loans and secured loans. Read more about them here.

Here are some of the reasons why people take out personal loans:

  • They have no or bad credit.
  • Pay less interest. Depending on your credit score, some personal loans will come with a lower interest rate than credit cards. Read more about personal loan interest rates.
  • They want to consolidate a number of other loans into one loan. This will allow them to make one payment instead of multiple payments. This type of loan is also called a debt consolidation loan.

Personal Loan Interest Rates

With credit card interest rates soaring as high as 30%, people continue to look for alternatives to credit cards, such as personal loans. Personal loan interest rates are often lower than credit card interest rates. The actual rate on the personal loan will be largely dependent on your income, your credit score, and your payment history. The higher your credit score and income, the lower your interest rate will be.

Some personal loans will come with a variable interest rate that change periodically while many others will have a fixed interest rate. Interest rates can also vary by bank and state, thus it is important that you do as much research as possible to find the best rate for your personal loan. This means the interest rate is locked and doesn’t change for the term of the loan.

The interest rate on your personal loan also depends on whether you take out a secured loan or an unsecured loan. The interest rate on unsecured loans is higher than the interest rate on secured loans.

Secured Loans Interest Rates

A secured loan is guaranteed by an asset. In order to borrow money, the borrower needs to first pledge an asset as collateral. The lender can take possession of this asset if you default and cannot pay off your loan. For example, when you take out a mortgage loan for a house, the asset that you pledge is the house itself. When you default, the bank has the right to take away your house. Using an asset as collateral ensures the lender that the borrower intends to repay the loan. This makes secured loans good risks for lenders, and thus they are able to offer lower interest rates.

Unsecured Loans Interest Rates

Unsecured loans are not backed by an asset. Since no property is used to guarantee this type of loan, it is a greater risk for the lender. Because of the greater risk, the lender charges higher interest rates.

Even though the interest rates on unsecured loans are higher than those of secured loans, unsecured loan interest rates are still usually lower than credit card rates, especially if you have a good credit score. If a secured loan is not an option for you because you do not want to risk pledging an asset, then you might want to consider looking into an unsecured personal loan.

Unsecured Loans and Secured Loans

Secured Loans
personal loan can either be secured or unsecured. A secured loan is backed by a type of asset that is used as collateral in case you default. In the event that you cannot pay off your loan, the lender can take the asset. For example, a mortgage is a secured loan backed by real estate. Other items such as stocks, bonds, or personal property can be used to secure a loan as well. Having this collateral reassures the lender that you have the intent to pay back your debt.

Examples of Secured Loans:

  • Mortgage
  • Home Equity Line of Credit
  • Auto Loan

Unsecured Loans
Unsecured personal loans, also known as “signature loans,” don’t require borrowers to use any asset as collateral. Rather, the institution will loan you money with just your signature. This means that if you default and are unable to make payments for the loan, the lender can’t automatically take your house or car as payment for the loan. However, the bank can still take legal action against you for their payment, such as filing a lawsuit. The higher risk for lenders is the main reason why unsecured personal loans are difficult to get.

Examples of Unsecured Loans:

  • Credit Cards
  • Personal Lines of Credit
  • Student Loans

 

Secured loans usually offer lower interest rates, higher borrowing limits, and longer repayment terms than unsecured loans. It is also important to remember that if you are unable to repay a secured loan, the lender has the right to the collateral you pledged and may sell off that asset in order to pay off your debt.

As with any loan, it helps to shop around rather taking a loan from the first lender who offers you one. Before you apply for any personal loan, make sure:

  • the personal loan interest rate is reasonable. If you can get a better interest rate on a personal loan than a credit card, it might make sense to take out a personal loan.
  • you fully understand what you are doing and are informed. Make sure there are no hidden costs.
  • that this solution of getting a personal loan will be of a real long-term benefit to you and not just a short-term fix.

What are Unsecured Loans?

Many people encounter emergency situations where unexpected expenses occur and they need additional cash. One way to borrow this cash is through an unsecured loan. Unsecured loans do not require the borrower to pledge an asset, such as their home or car, as collateral. Thus, if you default on an unsecured personal loan, the lender can’t automatically take a piece of your property as payment for the loan.

Examples of Unsecured Loans:

Advantages of Unsecured Loans

One advantage of unsecured loans is that you will not risk losing any of your assets if you are unable to pay back the loan. This type of loan is especially appealing to people who have limited assets. For example, these might be a good option for those who do not have enough equity in their homes to be approved for a home equity loan. Another advantage is that the interest rate on many unsecured loans may be cheaper than the interest rate on credit cards.

Disadvantages of Unsecured Loans

Since unsecured loans are riskier for lenders because there is no collateral attached to it, the interest is usually higher than a secured loan, such as a mortgage. For this reason, the loan amounts are smaller and the terms are generally shorter than secured loans. Keep in mind that, although lenders can’t take your house or car, they can take other collection actions. This includes reporting late payments to the credit bureaus, hiring a collection agency, and filing a lawsuit against you.

Since lenders gain nothing if you fail to repay the money you borrowed, they tend to base their lending criteria on your creditworthiness. It is generally difficult to get approved for an unsecured loan if you have a bad credit score, but some lenders will allow you to borrow if you have a co-signer with excellent credit.

Consider Your Options

Before taking out an unsecured loan, research and decide which type of loan is best for your situation. For example, you may want to compare the differences between a payday loan and a personal loan.

How to Get Out of Debt

To get out of debt, it helps to break the problem down into small, achievable steps instead of looking at it as one big, unsolvable issue. List out any hardship or reason that caused you to be in debt and take small actions to overcome each adversity.

Problem: You don’t know where your money goes.
Action: Are you making most of your purchases with a credit card or debit card? If so, log into your online account and track your purchases to see what you’re spending on. On a monthly basis, add up all your costs and allocate them into different categories: groceries, rent/mortgage, utilities/maintenance, transportation, entertainment, shopping, etc. Also decide which of these expenses are fixed costs, such as rent/mortgage that cannot be easily controlled, and which of these expenses are variable costs, meaning you are able to cut costs.

If you use cash instead of a credit card or debit card, you will have to manually list and track what you spend for a month to get this information. It helps to have a notebook and at the end of each day, write down how much money you spent that day and what you spent it on. At first, it may be annoying to write down everything you paid for, but this is a key step to getting out of debt. You’re in debt because you spent money you didn’t have, and often times it is due to multiple purchases as opposed to one single, huge purchase. Each day for at least one month, write down every penny you spend, no matter how small.

Problem: You know what you’re spending on but you’re just spending too much.
Action: It is easy to get caught up with all the advertising and spend your way into happiness. Realize this trap and distinguish between your “needs” and your “wants.” Your “wants” include new outfits and dining at fine restaurants, which rarely make us happy in the long run. Splurging often will mess up your budget and prevent you from reaching financial freedom. Instead of eating out all the time, look up recipes online and refine your cooking skills. If you are short on time, cook a big portion that can last you for more than one meal. If you are living with other people, try taking turns cooking.

Problem: You’re only spending on the necessities but you’re still short on money.
Action:If you are only spending what you need and you’re in debt, this probably means you’re not making enough income. Look for ways to increase your income a little bit at a time. If you already have a regular job and want to make money on the side, you can try short-term freelance jobs. Websites like Elance.com and oDesk.com offers jobs that allow you to work from the comfort of your own home. You can get paid for a number of things, such as writing and designing. You just need to research and find the right opportunities.

Problem: You’re spending too much money on your credit card.
Action: Examine your spending behavior. People tend to spend more when they use credit cards. Do you find yourself spending more when you carry your credit card around? If so, leave your credit card at home and use cash. When you pay cash, you can “feel” the money leaving you as opposed to charging away on your credit card, not thinking about how much you will need to pay later on.

Problem: You don’t know which debt to pay off first.
Action: If you have several credit cards and debts like student loans and medical debt, it can be confusing to figure out which debt to pay off first. In order to save yourself money, you want to pay off the debt that has the highest interest rate first. By doing this, you can avoid unnecessary and excessive interest charges. Also, see if you can obtain a lower interest rate by calling your lenders and asking for a lower rate. If they say no, you should look into balance transfer options or getting a consolidation loan. You can save a lot of money by lowering your interest rate.

Top 8 Reasons to Take Out a Personal Loan

Personal loans are designed for people who are in need of money to use for many different purposes. There are a variety of reasons why one takes out a personal loan. Here are the most popular reasons why people get personal loans:

1)   Essential Bill Payments – Unfortunately for some people, a majority of their income goes into paying for the debts they have, such as a mortgage and an auto loan. These people are left with little disposable money for the month. If there is an emergency that causes people to be unable to pay their bills on time, they have to take out a personal loan. This is especially true if the services will be discontinued if there is non-payment of essential bills, such as utility bills.

2)   Debt consolidation ­– A personal loan is commonly used to consolidate high interest debt, which is one of the best ways a personal loan can be used. If you have multiple credit cards with outstanding debt, getting a personal loan allows you to combine all your debts into one easy monthly payment as opposed to multiple payments. You can save a great amount of money in interest fees while making your monthly payments more management.

3)   Pay Less Interest – Unsecured personal loans come with a higher interest than secured personal loans, but the rates may still be lower than the interest rates on many credit cards. If you have a high credit balance on a card that has a high interest rate, taking out a personal loan with a lower interest rate to pay off that debt will help you save money.

4)  Finance Home Improvements – A personal loan can be a great way to finance home improvements, especially if the improvement will add value to your home and make money for you in the long run. Financing through a home improvement or construction company is also generally more expensive than a personal loan. The right home repairs and renovations can deliver a great return on your investment.

5)  Vehicle Purchase or Repairs – Some consumers use personal loans to cover vehicle repairs or to purchase a used or new vehicle. Sometimes, getting a personal loan to buy a vehicle is less complicated than applying for credit through a car financing company. Regardless of how you decide to pay for your vehicle, make sure to compare rates between auto loan financiers and personal loan lenders.

6)   Medical Expenses – Some people take out a personal loan to cover medical expenses that their insurance does not pay. It may not be a good idea to delay a medical procedure because you are unable to afford it, especially if it will cause health complications without it. It is better to borrow money you need than to put your own health at risk.

7)   Improve Your Credit – One of the factors in the model that credit bureaus use to calculate your credit score is your mixture of revolving credit lines, such as credit cards and installment loans. Taking out a small personal loan and making monthly payments on time for at least six months to a year before fully repaying your loan can help increase your credit score.

8)  You Don’t Qualify for Credit Cards – Some people may have bad or no credit and are unable to get approved for credit cards. These people can apply for secured personal loans as long as they provide an asset, such as their house or car, as collateral.