Common Loan Pitfalls - Save Money On Your Debt Payments
1. Secured Versus Unsecured Loans
Both options have their strengths and weaknesses but understanding what makes them different is essential should you default on your loan in the future. An unsecured loan is essentially when a lender agrees to allow you to borrow money without putting up some assurance in return, such as your home. Essentially if you default on an unsecured loan, whilst you can still be taken to Court to recoup the money owed, you are unlikely to face the prospect of having your home repossessed without a significant fight.
A secured loan is where the lender agrees to loan you money but in return you offer some security usually in the form of your home should you fail to meet repayments.
2. Temptation To Borrow Too Much
Another common loan pitfall is to be lured into borrowing more than you actually need. Credit organisations are very skilled at convincing you to borrow large sums and will actively sell you a dream of what you could do with the money, but the reality is that it is in their best interest to do this because they will earn more money from you in higher interest repayments. Be clear about how much you need to borrow and set a limit prior to contacting credit companies, so that you end up borrowing only what you need. Remember that a loan is not free money and borrowing too much will mean larger interest payments and could lead to you living beyond your means and getting into debt. Treat loans as a necessary evil and not as a way of financing luxury items.
3. Not Factoring In Future Interest Rate Increases
Interest rates are highly changeable and will vary depending upon how a country's economy performs. Between 1997 - 2007 the global economy has enjoyed relatively lower interest rates, meaning that people have often borrowed more, because they have the income to meet repayments. However this has not always been the case and the mid eighties saw interest rates at 15%. A common loan pitfall is to calculate repayments based upon what you can afford now and ignore what might be just around the corner. It is advisable to factor in at least a 2-3% increase in the interest rate. If you could still manage to maintain repayments within this context then you probably have a sufficient safety net, if not then you could run the risk of future problems with repayments.
4. Not Researching Loan Rates
One of the most common loan pitfalls is simply taking out a loan from an existing lender, high street lender or a well known name without doing your research. Banks and financial organisations love to stress their credentials as being a secure institution, but the financial credit crunch of 2008 saw trusted names like HBOS, Lloyds TSB and Bradford and Bingley all look very insecure. Instead use comparison sites like go compare and money supermarket to compare lending rates. These sites will compare hundreds of loan products across the market and find suitable loans based upon your chosen criteria.
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