If you plan on borrowing money in the near future, you should be prepared for how it may impact your life. While having the funds to go to school, buy a house or make some other large purchase may help you today, that money will need to be paid back eventually. Let’s take a look at what it means to accept a loan and the consequences of doing so.
What Types of Loans Are Available?
A loan is either considered secured or unsecured. If a loan is secured, it means that the borrower used collateral as a means of lowering the lender’s risk of not being repaid. Common forms of collateral include the title to a home or the title to a vehicle. Shares of stock or a stake in a borrower’s business may also be used to secure a loan. Unsecured loans include credit cards or medical bills, and lenders have nothing more than a borrower’s promise to repay a loan to depend on.
What Happens If You Don’t Repay the Loan?
The types of consequences that a person may face for not repaying a loan depend on whether it is secured or unsecured. If a loan is secured by collateral, the borrower may run the risk of having it taken away. For instance, failure to pay back title loans in Pembroke Pines may result in the vehicle being taken away.
If the loan is unsecured, a borrower could face a lawsuit or constant phone calls asking for repayment. In the event that a borrower fails to repay money to a lender, that person may see his or her credit score go down significantly. In a worst case scenario, it may be necessary to file for bankruptcy.
Be Ready for Interest Charges
In addition to the principal balance, a borrower will also need to pay interest to a lender. The interest paid on the loan compensates the lender for a lost opportunity to invest the money elsewhere during the repayment period. It also compensates the lender for taking a risk that he or she won’t see that money again.
Unsecured loans tend to have higher interest rates than secured loans as there is a higher risk of not being repaid. Furthermore, those who have a higher credit score tend to pay lower interest rates as they have a track record of paying their debts in a timely manner.
Lenders Base Loans On Your Credit Profile
Lenders tend to make loans based on what you qualify to borrow as opposed to what you can afford to repay. Therefore, you should base your borrowing needs on your budget as opposed to what a lender offers to give you. It may be possible to ask that a credit card limit be reduced or to lower the amount of a personal loan.
Borrowing money can be an effective way to get your education or to find stable housing for yourself and your family. However, it is important to understand the terms of a loan before agreeing to take it. This can help you better manage your budget as well as retain a high credit score now and into the future.