Personal Loans, Cash Advance and Secured Loans
Personal loans are offered by financial institutions and are to be used for personal expenses. The amount for the loan varies from bank to bank, but most banks offer from the low hundreds, some payday loans are up 1000 and many unsecured lenders are now offering loans up to around $25,000. The amount of the loan one receives depends on credit history and background. Personal loans are unsecured, making it different from a mortgage or car loan. In the event of a loan default in a personal loan, the bank repossesses nothing. There is no collateral. The time frame for paying back a personal loan also varies on the agreements and terms of the loan. However, these can last from 12-36 months. Since personal loans have no collateral the interest rates tend to be much higher compared to other types of secured loans. However, a benefit of personal, unsecured loans is that most banks offer them at fixed rates, meaning they cannot change the interest rate during the loan agreement.
Credit Card Cash Advance
A cash advance is made when a credit card holder borrows against their credit limit to obtain cash. This is usually done through an ATM. There are many risks to doing this: there is an initial fee on the cash advance that varies from 3-9% (depending on one’s credit history, background and amount of debt one already has), then the debtor is charged a very high interest rate on the cash advance, which can reach nearly 30% APR. Interest accrues immediately on cash advances, unlike traditional credit card purchases that offer a grace period. Credit card companies will also use monthly payments to pay off lower interest payments, meaning it can be very hard to pay off cash advances on top of normal credit card payments. If one is not careful, a cash advance can end up costing hundreds of dollars more than the initial advance.
Unlike personal loans, secured loans have an asset or collateral. These loans are often taken out for large purchases, most often cars, homes, or purchases of land. These loans come in either fixed or variable rate interest. Often the higher the purchase, the more likely a loan will be variable rate. Loans of this size also have a maximum threshold, meaning that a loan will only over up to 70-90% of the home price, meaning that one must pay a down payment up to 10-30% of the home price. Defaulting on these loans can entail a loss of car, home, land and much more.
When one is taking out a loan, all possible outcomes and possibilities should be weighed. cash advances
are to be used sparingly, if not at all. Financial planners often say to use this as a last resort; and secured loans are common for anyone planning on purchasing a car or home, which is very common in the United States. All loans carry a large burden and should be planned for accordingly. Making smart, educated choices and reading the fine print of all agreements can help one avoid defaults and even declaring bankruptcy. Know what is fixed rate interest and what is variable. Be sure to understand all risks when entering into a loan agreement too.