How does it work?

If you do not have the immediate finances to buy property, then you have the option of applying for a home loan. If you are granted the loan the bank will pay the full selling price of the property that you wish to purchase. Consequently, you will be liable to your home loan provider for the full loan amount and whatever interest is incurred over the repayment period.

The loan amount required to finance a property is no small sum. Repayments will therefore be spread over several years, anywhere between 5 and 30 years. The most common repayment period is 20 years.

Monthly bond repayments will begin as soon as your bond has been registered, and the monthly amount will be determined by the repayment period that you choose. The bank or home loan provider will also charge you interest on the sum that you owe. The interest rate is determined by your home loan provider, the repayment period that you select and the type of loan that you decide on.

Types of Home Loans

The most common home loans in South Africa are the fixed rate home loan and the variable rate home loan.

• Fixed Rate Home Loan

A fixed rate home loan offers you a fixed interest for a set period of time. You will be able to decide how much of your home loan you want to fix, either the whole sum or a portion.

Security and peace of mind are the main benefits offered by this type of loan. A fixed rate home loan allows you to avoid the anxiety that accompanies sudden rate increases.

• Variable Rate Home Loan

A variable rate home loan is related to the South African overall home loan rate, the ‘repo’ rate. If you opt for this type of loan, your monthly repayments will be affected by market conditions, so if the SA home loan rate increases, your home loan rate will increase as well and so will your monthly repayments.

This type of home loan is only beneficial when market conditions are favorable. There is a certain level of uncertainty and risk that accompanies a variable rate home loan. It is especially dangerous for those who can only just afford the loan to begin with.

What are the Lending Criteria?

As with any loan, there are certain criteria that you will be required to meet. These criteria differ from one home loan provider to the next.

Generally, you will have to provide proof that you earn a specified single or combined monthly income. This will determine whether you are able to afford the monthly repayments. Your credit profile will also determine whether you meet the lending criteria of a home loan provider. Most providers will ask you to provide proof of your employment history, your income and your consumer bureau results. This determines whether you are credit risk to the bank or home loan provider.

Take a Moment to Consider

If you’ve found the home of your dreams, then you may be considering a home loan. Weigh up your options carefully and make sure that you meet the lending criteria. A loan to finance a property is a significant sum and requires a long-term commitment. Make sure that the time is right.

If you’re looking to take out a bank loan, it is important that you have a basic understanding of the different types of loans on offer, the terms and interest rates provided, and the repayment period options.

Types of Loans

There are two main types of loans that banks offer; secured and unsecured loans. A secured loan is simply a loan that is extended to you on the condition that you provide one or more of your assets as collateral. You will be charged a competitive interest rate on a secured loan, but if you default on repayments then you risk having your property or your vehicle repossessed.

An unsecured loan is one where you do not provide any form of collateral in exchange for a loan. Since there is more risk involved for the bank, you will pay a higher interest rate on the loan.

Terms and Interest Rates

Interest rates are varied depending on the size of the loan requested, the lending institution, and the terms of the specific loan. Shop around for the most competitive interest rate.

In some cases, like a home loan, you will have the option of choosing between a fixed rate loan and a variable rate loan. A fixed rate loan will set your interest rate for a specified period so that you will not be subject to interest rate fluctuations. On the other hand, a variable rate interest loan will be determined by market inclinations. If the market rate goes up, so will your loan interest rate and your monthly repayments.

Repayment Period

Repayment periods are subject to the type of loan that you select and the bank that you choose. With a home loan it could be anything from 5 to 30 years, with a personal loan it usually varies from 24 to 84 months, and the repayment period for vehicle finance is generally up to 84 months. 

One thing to remember is that you need to calculate the interest that is incurred over the total repayment period. Often loan providers will lure you by offering a competitive monthly interest rate if you take the loan over a longer period; however, when you calculate the total interest accumulated over the entire repayment period, you may discover that you are paying a hefty sum in the long-term. Also, beware of loans that offer you an initially low monthly repayment, only to beef it up further down the line.

What Loans do Banks Offer?

Banks offer loans that are tailored to suit individual needs. There are different solutions for different financial requirements.

• Home Loans

There are a variety of home loan options available. Dependent on whether you meet the lending criteria, a bank will grant you a loan to cover the asking price of a property owner. You can choose a repayment period of anywhere between 5 and 30 years. There are also a number of loan types available; the main categories are the fixed rate home loan, variable rate home loan, and the capped interest rate home loan.

• Personal Loans

A number of banks offer small to moderate loans for personal use. These loans can be used to finance anything and they take a relatively short amount of time to process – perfect for when you need cash, and you need it fast. The repayment period is usually flexible and can be paid off in a period of up to 84 months.

• Student Loans

Banks offer student loans to people who are looking to finance their studies. A student loan can be taken out under the name of a sponsor or guardian who is able to provide proof of monthly income. You will be required to pay the monthly interest on the loan while you study. After your studies are completed, you will be responsible for paying the loan capital. 

• Vehicle and Asset Finance

Purchasing a car or asset is made easy through tailor-made loans. An installment sale agreement allows you to purchase a vehicle or asset and repay the loan over a negotiated time frame. Most banks also offer lease and rental agreements if you’re looking for the immediate benefits of an asset without the long-term commitment. 

• Overdraft

Overdraft facilities are available on most bank cheque accounts. A line of credit is extended to you when withdrawals exceed your account’s overall balance. This facility most often comes with a negotiable interest rate.

Conclusion

There are a number of bank loans to meet your individual requirements. Whether you’re looking to purchase a home, to finance your studies or to buy a new car, there is a tailor-made loan for you.

A loan is essentially a sum of money provided to you by a lender that comes with a specified repayment period and a calculated rate of interest. The appropriate type of loan is decided upon depending on the particular needs of the borrower.

Loans can be taken out for personal or business uses, ranging from a personal purchase to a mortgage for a home or office building. Every loan differs in terms of its conditions, which will be agreed upon contractually between the lender and the borrower. The main types of loans are as follows:

Interest-Only

With this kind of loan you only pay interest for a limited number of years, which means that you initially have significantly lower monthly payments. All types of loans – including a fixed-rate and adjustable rate loan – can include an interest-only payment option.

Lenders must be aware of the risk involved in this kind of scheme as your interest-only period will eventually expire. This can raise your monthly payments considerably because you will have to repay the full balance of your loan in a shorter period of time.

Remember that although you are paying off the interest on the loan, the overall mortgage balance doesn’t decrease. This option is usually better suited to people making good money as it will be difficult to make increasingly big payments over time if you are still earning the same amount.

Fixed-Rate

In this case the interest rate attached to the loan will remain the same throughout the entire term, giving you peace of mind that your payments will never go up. On the downside, you will have to pay a slightly higher interest rate because of the fact that your interest rate is fixed.

Your fixed monthly payment is the amount that you pay each month to ensure that the full amount is paid off, along with the interest, by the end of the period agreed upon. The term of repayment ranges between 15 and 40 years, and it is generally a rule that the longer your repayment period, the higher the rate of interest that you will be charged.

Adjustable Rate Mortgage (ARM)

ARMs are popular because they offer the borrower a lower interest rate to begin with, which then increases or decreases every 6 to 12 months. The fact that it starts out as a fixed-rate loan means that your monthly payments will also be lower at first.

The advantage is that lower monthly installments will help put you in line for a larger borrowed amount from the lender. However once the fixed period expires, your interest rate can escalate, resulting in higher monthly payments for the remaining period of the loan term.

Balloon Payment

The balloon payment refers to the final lump sum that makes up a sizable portion of this loan structure, which is the last payment the borrower makes on the loan to pay it off in full. The rest of the lending term is comprised of smaller monthly payments that take place at regular intervals.

Be aware that this loan has negative implications if your financial situation isn’t stable enough and you find yourself unable to afford the balloon payment at the end. This justifies its other name – a bullet loan – as you could be hard-hit by this big payment which could result in your assets being seized by the bank or lender. It is common for lenders to take out a balloon loan as their second mortgage plan, and this kind of lending scheme can be accompanied by either a fixed or floating (adjustable) interest rate.

Since most credit loans are unsecured loans, they do not require you to risk your property or any of your assets in the form of collateral. Granted that you meet certain criteria, a bank or lending institution will offer you a line of credit that you can use when you have need of it. Interest will be charged on all money that you decide to borrow.

The main types of credit loans are overdraft facilities, credit cards, and revolving credit personal loans.

Overdraft Facility

Banks provide an overdraft facility on cheque accounts; hence you will need a cheque account if you want access to an overdraft facility. The bank will make a certain amount of money available to you every month on this account, an overdraft limit. The amount of money that the bank extends to you will depend on your monthly income and your credit profile.

• How Does it Work?

If for instance your overdraft limit is R1000, you will be able to spend in excess of your account balance to the value of R1000 every month. If you use R600 of the R1000 overdraft limit, you will be charged interest on R600. When you are paid at the end of the month, the overdraft deficit together with interest will be debited from your account. Thereafter, you will once again have access to the R1000 overdraft limit for the next month. 

The interest rate charged on overdraft facilities are determined by your credit profile. Banks charge interest according to the prime lending rate and the usury limit. This means that interest rates are negotiable and vary from one bank to another. Take some time to look for the best deal.

Most banks charge a once-off introductory fee to set up overdraft facilities. Thereafter, a small monthly administration fee is charged on overdraft limits that exceed a specified amount.

Credit Cards

Most lending establishments and all banks offer credit card facilities. There are a wide variety of credit cards available, each customized to suit specific income brackets and individual requirements. If you meet the lending criteria, you will be issued a plastic card that has a line of credit allocated to it, known as a credit limit. 

• How Does it Work?

Credit card holders can use their card to make purchases at selected merchants. When you use your line of credit, you are liable to the credit card provider for the full amount that you use plus interest. The interest charged on credit card debt is usually more than that charged on other forms of debt.

There are credit cards available to people in high and low income brackets. If you earn a large monthly income, there are more options available to you. Reputable lending institutions that comply with the National Credit Act will also conduct a credit profile check to ascertain whether you qualify. Your profile and the type of credit card you select will determine the interest rate that you pay.

Revolving Personal Loan

Some banks provide a unique personal loan known as a revolving loan or a revolving credit plan. This type of loan provides you with a revolving line of credit. It has an indefinite repayment period, and it allows you the freedom to rotate back to your limit once 15% of the loan has been paid. In other words, once you’ve paid 15% of the loan total, you may borrow again on the same loan to the agreed upon limit without affecting repayments.

• How Does it Work?

If you take out a revolving loan to the value of R8000, you will begin to pay it back in fixed monthly installments. Once you have paid back 15% or more of the R8000 loan, 15% of R8000 is R1200; you will be able to borrow this money back. In essence, you have a continuing line of credit.

Like an overdraft facility, the interest rate charged on a revolving credit loan is calculated according to the prime lending rate and the usury maximum. Interest is usually calculated daily and capitalized monthly. Make certain that you are aware of initiation fees and any monthly service fees involved.

The loan amount and interest rate that you qualify for is determined by your monthly income and your credit risk profile.  

Making a Decision

Credit loans are ideal for short-term financial dilemmas. They are best used for improving your cash flow, attending to an unexpected expense or purchasing something for which funds will soon become available. Try to avoid steady interest accruement and the continual debt cycle by paying back the money that you borrow as soon as possible.

Regardless of the nature of your debt, or how much of it you have accumulated, it is vital to tackle it head-on by finding the right repayment plan. This will help get you back on track financially and avoid prolonged agony over money matters. The only way you are going to improve your situation is to deal with your debt realistically instead of simply wishing it away.

Fortunately there are various lending schemes offered by banks and other financial institutions that will get you started. The two main categories of loans that are specifically designed to resolve your debt dilemmas are debt consolidation loans and debt relief loans. It is important to consider the features of each before you immerse yourself in the obligations that come with either one.

Debt Consolidation Loans

The high interest rates that come with the majority of unsecured loans today make it difficult for the average person to maintain payments. This is why a debt consolidation loan might be a viable alternative: it allows you to pay off all your unsecured debt with one unified loan and eliminates high payment fees. Thus, this kind of financing plan enables you to pay off many loans with one big loan.

Typically an asset is presented as collateral, most commonly in the form of a house, which then serves as protection against the secured loan. A major perk is that the borrower is awarded a reduced interest rate because they are viewed as less of a risk by the lender.

People considering a debt consolidation loan should keep in mind that this presents another loan, which means further debt – but it does offer multiple advantages at the same time:

• You can arrange the monthly payments to suit your budget.
• The interest rate on this loan will be cheaper than the interest that you are collectively paying on your other loans.
• If you keep up with these repayments, lenders will note your improved credit record; a better credit rating means lower interest rates in the future.
• You will only have to worry about a single payment to your creditor each month.
• The overall monthly administration charges on all your separate accounts will be significantly reduced.

Consolidating your total debt into one loan is a good way of managing your outstanding balance in a more structured and convenient way. Soon you will back in charge of your finances, as it will be up to you to decide how much you can afford to pay each month and on what terms.

Debt Relief Loans

The handiness of a debt relief loan is that anyone whose finances are in disarray can consider it as a possible way out. In this case though, the lender has the upper hand when it comes to the terms of your payment scheme. Debt relief companies often have strict payment policies, and the terms and conditions attached to the money you borrow are entirely their decision.

In this case your credit history is crucial, as debt relief loans operate according to a calculated interest rate that determines your payments. A debt relief company will immediately scan your credit history before taking you on board. Still, there are several advantages involved:

• It is usually an unsecured loan so you don’t have to worry about providing collateral or risk losing the asset you put down.
• You can use this loan to pay off all your other separate debts.
• Only apply for this type of loan when the interest rate that you are paying for other loans is higher than the general rate of interest prevalent in the economy; this will provide you with a lower interest rate.
• You can have a go at negotiating a lower repayment sum with your lender, which is more probable than in other loan scenarios.

Usually individuals only go down this road if they are experiencing an excessive financial burden. It is advisable to avoid this type of loan unless you really need it – the last thing you want is to place yourself in an even more precarious financial position.

There are essentially two reasons for opting for a secured loan: firstly, it relieves the creditor of the financial risk involved as the bank can seize the client’s assets should the loan not be paid back on time or if other problems arise. Secondly, during the exchange process the borrower will be granted a loan on more favourable terms than if it were an unsecured loan. Due to the fact that collateral serves as protection for the money lent, the borrower has the option of extending the credit and will also be offered lower interest rates and more flexible repayment periods.

Thus, a secured loan is fairly easy for a homeowner to obtain, as the creditor will determine the maximum total that you are able to borrow from your property value or market equity value. Another advantage is that anyone can be considered – even people that are plagued with a bad credit history or have been blacklisted after defaulting on previous account payments.

Even though credit providers will be cautious about lending money to someone with a poor credit record, the chances are significantly higher if you opt for a secured loan. You will be viewed as less of a risk if you can present property or a valuable asset to sign against the money you are borrowing.

Loans According to Needs

The particular kind of secured loan that is best-suited to your individual needs depends on your reasons for taking out the loan in the first place. There are special secured loans for specific purposes which include a home improvement, holiday, car, and a wedding loan. Otherwise a common option is the secured consolidation loan that people use to transform their multiple debts into a single loan to make it more manageable.

Different Levels of Financial Security

After deciding on the appropriate loan for your needs, you will have to scan the different levels of loans that are available that rate according to financial security. The four main ones offered by financial institutions are as follows:

• Non-Recourse Loan

This secured loan dictates that the collateral that has been put down is the only security that the lender has against the borrower. Thus, the creditor has no further recourse against the borrower if the applicant defaults on the loan. The security only extends up to the value of the collateral – whether it is a car, property, stocks, expensive jewellery or even a savings account. If repayments are missed the bank can seize the collateral but the lender’s recovery is limited to the value of that asset. For example, if the asset is insufficient to cover the outstanding loan balance, the borrower will not be liable and the lender will suffer a loss.

• Mortgage Loan

With a mortgage loan the collateral in question is always in the form of property. In simple terms if the applicant is unable to repay the mortgage he or she will lose their property. Although the mortgage itself isn’t classified as a debt, it serves as the lender’s security for a debt. The mortgage is effectively the transfer of an interest in property to a lender as a security for the money lent.

The next two aren’t generally viewed as types of secured loans by the average person, as foreclosures and repossessions operate slightly differently:

• Foreclosure

This is a legal process that involves the sale of mortgaged property in order to pay a debt when the borrower has defaulted on its repayment. It is seen as a secured loan in that it resells the property to return the outstanding amount, and can only be applied when a property is presented as collateral.

• Repossession

In a way repossession is similar to a foreclosure in that the lender can secure lost monies owed by the borrower. The process of repossession means that the property or collateral is seized by the creditor in the event of the borrower missing payments on the loan. This can require a court order depending on the jurisdiction.

Taking out a loan is a straightforward way to gain control of your finances. A personal loan and a payday loan are the two main types of loans that will provide you with immediate cash to cover your unique personal expenses. 

Personal Loan

A personal loan is a cash loan that can be used to finance anything, an unanticipated expense, new furniture, or a holiday. You can opt for either a secured or unsecured personal loan. A secured loan requires that you provide some form of collateral as security, and in turn it generally provides you with a low interest rate. Conversely, an unsecured loan does not require you to provide any collateral and thus charges you higher interest.

A personal loan will provide you with immediate cash once your application has been processed, depending on the bank or loan provider. Personal loan providers generally provide repayment period flexibility, offering anything between 24 and 60 month repayment periods. Interest and monthly repayments are determined by your respective loan terms and your credit risk profile.  

Unlike a home loan or debt consolidation loan, a personal loan does not dictate how you should spend the loan money. However, reputable lending institutions are required to conduct a credit check under South-Africa’s National Credit Act. You may be denied a personal loan if you have a bad credit profile.

Payday Loan

A payday loan, also known as a cash advance loan, is used to cover your expenses until your next payday. This type of loan will provide you with money fast, and is a viable option if you find yourself short of cash near the end of the month. If your application for a payday loan is accepted, it will usually only take a few hours to process your money.

The amount that you will be allowed to borrow will differ from one provider to another. Generally, first time payday loans offer R500. Subsequent payday loans increase by up to R1000.

The payday loan, like the personal loan, is available as a secured or an unsecured loan depending on the lending institution. However, even a secured payday loan will not require you to be a homeowner. Banks very rarely offer payday loans, so beware of possible scams that lurk on the internet. Investigate your options and conduct a thorough background check on the loan provider.

When applying for a payday loan, you will be required to prove that you have an active bank account and that you are currently employed in order to be considered. Some providers will also conduct a credit check to ascertain whether you are a suitable candidate.

A payday loan is intended for short-term use, as its name implies – it should ideally be paid back when you receive your next paycheck. This type of loan is more effective if it is paid back quickly. The repayment period is generally around 31 days, a monthly wage cycle. You will pay interest on the amount that you borrow, usually in the region of 20%. If you default on payments, this amount will increase with every new month. It is possible to accrue a significant amount of debt if this loan is not used on a short-term basis.

Things to Consider

Personal and payday loans are great when you need cash and you need it fast, especially if you don’t have a credit card and you don’t want to put a strain on your relationships by asking friends or family members for money.

Personal loans are designed to offer you small to moderate amounts of money with a flexible repayment period. The lending criteria for a personal loan are somewhat more stringent than for payday loans.

On the other hand, payday loans are designed to provide you with a small amount of immediate, hassle-free cash to see you through to the end of the month. The interest rate is not as competitive as other loans, but payday loans are definitely a great way to deal with unforeseen financial hiccups mid-month. As with any debt accrual, weigh up which loan suits your individual financial needs.

A personal loan is a feasible option for anyone who needs access to immediate cash for personal use. There are two basic types of personal loans, secured and unsecured loans.

Secured Loan

A secured loan requires you to offer one or more of your assets as a form of collateral. If you are unable to repay the loan, the lending institution will be able to repossess your assets for immediate repayment.

You will generally be offered a competitive interest rate if you take out a secured loan, because the risk to a lender is not as high as in the case of an unsecured loan.

Unsecured Loan

An unsecured loan does not require that you provide any form of collateral. Consequently, you will pay more interest on an unsecured loan because the risk to the lender is greater.

There are many banks and lending institutions that offer unsecured personal loans. These are specifically tailored for people who do not have any property or assets to offer up as collateral.

Personal Loan Basics

A personal loan will help you to avoid the complications of borrowing money from friends or family members, and it may also be a viable option if you don’t want to rack up high interest credit card debt or affect your home equity. If you have a good credit rating and you’re looking to borrow a small to moderate amount of money, then a personal loan may be the most practicable option for you. 

You can take out a personal loan of as little as R2000 or as much as R150 000, depending on the lending institution. Most banks and loan providers offer flexible repayment periods, so you can choose whether you want to pay it off over a period of 24, 36, 48 or 60 months. Monthly repayments are usually calculated according to your loan terms and your risk profile.

The National Credit Act has ensured a new level of responsibility in South Africa’s financial sphere. Lenders are required to do a credit and affordability check to ascertain your risk and credit profile.

Personal Loan Lending Criteria

Most reputable loan providers will ask you to provide them with your most recent monthly payslips, your South African identity document, your latest bank statement, and proof of residence.

Some added criteria requires you to provide proof that you have worked for the same employer for a few, usually three, consecutive months; that you earn a specified salary, somewhere in the region of R1500 per month; and that you take out insurance on your loan to protect you in the case of retrenchment, disability or death.

Things to Consider

Personal loans are often advertised as a way to consolidate debt. This is not an advisable course of action, as there very few personal loans on offer that are large enough to comprehensively settle a previous loan or multiple loans. If you’re looking for a loan to settle your debts, then a debt consolidation loan is the better option.

As with any loan, shop around for the best interest rate and always choose a reputable loan provider. Taking out a loan requires you to have a certain level of maturity and responsibility. Do not borrow more money than you can afford to pay back. If you take out a secured loan, you risk losing your assets if you default on payments, and you also risk doing serious damage to your credit rating if you fail to repay the loan. Take these things into consideration before taking out a loan.

An advantage about this type of loan is that the bank or financial institution lending you money can’t repossess your assets, if you are unable repay the outstanding amount. However, this doesn’t mean that they can’t hold you liable in other ways: the lender has the prerogative to take legal action against you if you default on your payments.

The three most common unsecured loan plans are bank overdrafts, credit cards and personal loans. Depending on the type of payment plan you choose, the repayment period can range anywhere in the region of 6 months to 10 years. Also be aware that unsecured loans have different terms and conditions depending on the lender, so it is worthwhile to shop around. It is important to familiarize yourself with these three unsecured loans before attempting to set your finances straight.

• Bank Overdrafts

These are only obtainable via prior arrangement with the lending institution or bank, and you will not be considered if your bank account isn’t in an acceptable state. A bank overdraft effectively entails a withdrawal that exceeds the balance currently in the client’s account. This scenario immediately places you in the red, as you are indebted to the respective creditor.

For somebody who isn’t in a very stable financial position, this is a handy option as you only pay interest on the amounts borrowed. Overdrafts include a higher interest rate though, given the absence of collateral. Thus, they can take years to pay off which won’t help solve your already bad credit record. The lender could also request the repayments sooner than you expected, which can also wreak havoc with your finances.

• Credit Cards

A credit card system involves the bank or creditor issuing you with a line of revolving credit that takes the physical form of a card. Each time you make a credit card purchase, you give authorization that you agree to pay back that amount of money along with the additional interest.

Even though there is a clear convenience factor involved because credit cards can be used worldwide and are safe to use, they are a temptation for people who are already prone to overspending. Due to the fact that money isn’t deducted from your account you are in danger of running up exorbitant outstanding bills. If you fail to pay back the loan amount in the appointed time, you could be charged additional fees and possibly face serious legal proceedings.

• Personal Loans

An unsecured personal loan is a good idea for a person who prefers not to use their home or another valuable asset as collateral against the loan, and can be a lifesaver when you urgently require cash – for a wedding, unplanned vacation, or to settle medical expenses for example. Keep in mind that it helps to have a first-class credit rating when trying to get your loan approved.

Again, as with general unsecured lending schemes, the funds provided to you will come with a relatively high interest rate – however, varying rates are available if you look in the right place. This also means that the amount lent will be significantly reduced compared to the size of the loan you would get in a secured case. Nonetheless the repayment period makes it manageable, as this can extend up to 10 years.

Your monthly payments will be calculated according to your earnings and financial standing, so it won’t be something you can’t afford. It is ideal for individuals that are starting out, such as a non homeowner paying rent or a student who doesn’t have a stable income. Another bonus is that these loans are generally issued with immediate effect and don’t involve endless documentation in order to get approved.

Bad credit loans are specifically designed with these individuals in mind: people who have had bad credit experience in the past and even those who have had no credit history at all.

What does a Bad Credit History Entail?

If you are listed as having bad credit history, your credit score will typically be in the region of less than 580. This will be determined by a range of factors including missed payments, arrears, and even court judgments that classify you as bankrupt.

Just because you have a record of bad credit doesn’t mean that there are no companies that will lend you money. You will naturally have to pay more for these loans because you are a high risk borrower, but there are different types of bad credit loans that you could consider that will help get you out of the red.

Types of Bad Credit Loans

• Unsecured personal loans

Even though the title of this loan can be off-putting, you should not rule it out as a viable option to your debt crisis. Also known as a personal loan, this scheme actually presents a less risky option because the borrower doesn’t have to put a valuable asset such as a house up as collateral, before they are considered for the loan.

Instead of the person’s assets serving as protection, this loan will be supported by his or her credit rating. The average repayment period for an unsecured personal loan is five years or less. On the downside, due to the fact that a relatively small amount is being lent for a short lending period, a slightly higher interest rate will be calculated for this kind of loan – especially if the borrower has a bad credit rating already.

• Secured loans

If you decide to opt for this loan you will have to offer some form of collateral that serves as protection, in case you are not able to pay back the loan you have taken out. The perk about this is that the borrower will be able to acquire a larger amount from the lender, than he or she would from a normal personal loan. Due to the security offered on the loan, the lender will view the borrower as less of a risk, and offer that individual a favourable rate of credit.

Often secured loans are preferred because they are easier to obtain given the security factor, the repayment period for the loan is significantly longer, and a larger sum of money can be borrowed at the outset. Be aware that there is a massive risk involved in such a scheme as the lender can seize your property or asset at any time, if you happen to miss loan payments or do not fulfil your end of the deal.

Start a Fresh by Acting Responsibly

A simple rule of thumb is that if you know you will be unable to meet the obligations of your new bad credit loan, you should resist borrowing the money in the first place. The last thing you want is to damage your credit rating even more.

Of course people that have bad credit are the most risky clients for lenders, as they do not have a good track record when it comes to loan payments. At the same time, some credit loans are outright scams, which is why you should do some research to double-check which lender companies are reliable to borrow from, and which ones are simply trying to make an extra buck out of you.