Everything you need to know about a consumer loan

Finance, and loans in particular, is a subject that is a bit difficult to cover in most scenarios. I know I absolutely do not enjoy sitting down with my partner or my parents to discuss debt with them, and I'm sure I'm far from the only one who feels that way. Unfortunately, this discomfort doesn't really change the fact that there are often conversations that need to be had.

Therefore, I think it is important that we stay as educated as possible about these types of things. News about developments in the economy is not something that most people look at compulsively (and I certainly do not mean that you should), but taking a look every now and then certainly does not hurt.

But if you're out of the loop when it comes to consumer and personal loans, don't worry. Today I'll cover some of the most important details to know, as well as explain what about them has changed over the past few years. Although it may sound strange, there have actually been some interesting developments!

What makes consumer loans different?

When it comes to the differences between the types of loans out there, the key feature of these is pretty self-explanatory. Having said that, however, what you should know is that they are intended for personal use. Basically, an individual or a small group borrows money from a lender for a variety of reasons, but it cannot be used for business.

After all, there are special credit agreements aimed at businesses, so that's what really sets consumers apart. Given how big of a difference this is, however, it's important to understand. Now that that's out of the way, we can turn our attention to something a little more interesting.

Quick facts about consumer loans

There are some important characteristics of them to be aware of. The biggest is probably the fact that they tend to come with relatively high interest rates. You can read more about why exactly here, consumer loanguide.com/, because there is too much to cover for me alone. Regardless, it's worth paying attention to interest rates, as they will be a pretty big deal to you as a consumer.

Obviously, when you borrow money, you have to pay back the principal (initial) amount to the lender. However, the extra fees they charge you come in the form of interest. That's more money you'll be paying in the long run and can significantly affect the amount of your monthly bills.

For most people, this is probably pretty obvious, but it's a big thing to be aware of here. When sorting out your first contract with your lender, make sure you read it over several times and fully understand what the loan terms are. Compound and simple interest are quite different, as just an example of what to look for, and it can have quite a big impact on what the total cost of the loan will be.

You may be wondering why there is such a high cost of personal loans, and I can certainly understand why. It seems strange that a mortgage or car loan can have a lower interest rate than a small personal one, right? As it happens, however, there is a perfectly reasonable explanation for this apparent discrepancy.

This is due to the fact that with these there are no collaterals. For mortgages and car loans, on the other hand, the car or house is the security if you default on your payments. Personal loans just don't have that, unless you're going to a pawn shop or something like that.

Lack of collateral means that these types of credit agreements are inherently more risky for the lenders involved. How do they compensate for that? Simple – they charge their lenders a higher interest rate.

When are they worth it?

Borrowing money is an uphill battle, that's for sure. Usually, it's not exactly a good idea to just get yourself into a lot of debt for little or no reason. However, this raises the question: when is it appropriate to take out a personal loan?

To be perfectly honest, though, it's a pretty difficult issue to tackle. Given all the factors that can come into play in a person's life, I can't exactly say what is a wise choice versus what is not. For example, personally I would not want to get a personal loan for my wedding. I have a plan that just wouldn't make something like that necessary. But there are plenty of people who do just that and are able to do well in their repayments — heck, it even gives them a boost to their credit in the process.

Do you understand what I mean though? It's just such a complex and subjective topic that I can't put a pin on exactly when it's a good idea. That said, there are some situations where it won't really work. Buying a home is definitely one of them.

Chances are you won't find anyone going around trying to buy properties with personal loans. The high interest rates alone don't make it worth it, even if you don't have the collateral involved. Beyond that, however, it is seriously unlikely that you would be approved for the huge amount of money you would need for a home via a personal loan.

Beyond that, though, there aren't a lot of situations that I would say there are Never will be worth it. It's something so subjective to each of us, you have to figure it out for yourself. What could you spend the money on then?

Before I get into that, it's worth noting that you should probably tell your lender at least some of what you intend to use the funds for in your application. Either way, the possibilities here are almost endless. For example, you can get a personal loan to pay for a vacation for yourself and your family.

But you can also choose to consolidate your previous debts and combine them all into one monthly payment in a loan that charges less interest than the others. Another option is to build your credit with smaller microloans so that you have an easier time later in life when trying to get a mortgage or a car loan!

Of course, this is far from a comprehensive list of options, but hopefully it helps you understand what I'm talking about here. You have to be the one to decide what you want to do, and whether your particular expenses justify adding the monthly payments and high interest rates to your document.

Something that can help you there is to start formulating a potential budget as soon as you can. Talk to your lender or use some of the online tools we have available to predict what your new monthly bills might look like if you take out this type of credit agreement. Decide whether or not you can handle the extra cost – and whether you really want the extra responsibility.

Once you're sure it's something you can handle, you can go ahead and proceed with the application process. It can be a long and difficult road to get approved, so I wish you the best of luck!