According to the business dictionary, a consumer loan is an amount of money lent to an individual (usually on a non-secured basis) for personal, family, or household purposes. Consumer loans are monitored by government regulatory agencies for their compliance with consumer protection regulations such as the truth in lending act. However, a consumer loan provides you with both flexibility and the opportunity to spend the money as you see fit. Unlike credit cards, these loans are usually supplied with a lower interest rate and longer down payment.
In this article, we will take a closer look at when it is appropriate to use a consumer loan, and vice versa and when can a consumer loan be the right form of financing.
An unsecured loan or a consumer loan means that the debtor doesn't need to put up collateral for the loan. Yet, the lender(s) have other ways of getting their money back, so it should not be misinterpreted. Such loans are a better fit for individuals with stable finances and Income. In other words, people with a steady income are only advised to take consumer loans,
If you have a decent credit score you'd also get rewarded with lower interest rates. That's because the risk of default is lower, compared to the bank requirements.
Unsecured loans are also a prudent and easy way in those cases where there are no realistic ways to secure the loan. For example, you'd never finance your house this way (that's why we have mortgages), but you may want to use it for other purchases that can't be secured.
Loans with no collateral should also be used to finance goods with a long-lasting value but experts do advise that the consumer loan should only be used for personal or short time plans. For example, if you plan to launch a new line of product that could bring in profits as soon as possible.
What consumer loans should not be used for?
Here is a short and summarized list of what should not be financed with the unsecured loans:
1. Fixed monthly costs: Unless we're talking about a one-time investment exception (say the processing machine broke down unexpectedly), you should never use unsecured loans to cover your fixed monthly costs so that you won’t find yourself in a bigger trouble. If you can't afford to pay these expenses on a monthly basis, it's an indicator that your household budget is under severe strain. Borrowing money to pay the bills will only add to the financial strain of your household.
2. The down payment on a mortgage: You are not advised to finance the down payment requirements with anything but your personal savings. There are several reasons for this, but the most important one has to do with the financial risks you're taking which may be dangerous for your income. Should interest rates rise (or if you lose your income), you'd have severe problems covering the monthly mortgage bills. An unsecured loan would only add stress to the situation at hand so, think about it.
Also, the main reasons why banks demanding a down payment in the first place. It's so that you'd take less of a financial chance when you sign for the mortgage.
3. Interest on other loans: This may seem obvious, but should not be ignored. Do not use a consumer loan to pay interest on other loans. You're just pushing the problem ahead of you if you do so, just like if you are adding fuel to the fire.
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