Financial emergencies are some of the most common experiences that adults have to deal with every now and again. While we can argue that efficient financial management can help make whatever funds we have stretch to meet our needs, the truth is simply that at some point, everyone needs some help and this is where consumer loans come to the rescue.
In this article, we shall take some time to discuss the subject of consumer loans, what it is, how it operates and how you can get the best offers. At the end of this article, you should have a good understanding of what this loan is and how you can ensure that you find one that will serve you perfectly should you ever need one.
What is a Consumer Loan?
A consumer loan is a type of credit facility given to consumers to meet specific personal needs. It is so named to differentiate it from other types of credit facilities like business or commercial loans. With a consumer loan, you can take care of personal expenses like home repairs, vacation expenses, and other such personal needs.
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How Does it Work?
Consumer loans are mainly unsecured loans which mean that applicants are not required to put up any form of collateral before the application is approved. Even in some cases where the loan is secured, it is secured with the item that the credit facility was used to finance.
A good example is an auto loan in which the purchased vehicle is used as collateral. The vehicle is not presented before the loan is approved, instead, the loan is approved and the vehicle purchased. The lender then reserves the right to recover the vehicle should the customer fail to repay the debt.
Consumer loans follow a simple process which begins with the customer submitting an application. In the application, the lender will request information like:
- Proof of identity
- Residential Address
- Employment status (to include employment history)
- Income
- Marital status
The above are among the common information that a lender will require. Some may require more information than these but whatever the information may be, it will be something you can easily provide.
Once done with the application and submitting same along with whatever supporting documents that the lender may require, the next thing will be to wait for the lender’s approval or rejection. Because this type of loan is usually unsecured, the lender will run a credit check to look through your credit history. A good credit score grants an applicant access affordable consumer loans while a poor score reduces your chances of getting the loan approved.
Once an application is approved, the lender will disburse the approved funds into your account. Depending on the loan type, the funds can be disbursed in bulk or in installments. For this type of loans, the funds will usually be made available in as little as a few minutes or some hours. This again will depend on the lender, as their modes of operation will differ, one from the other.
Following the disbursement of the approved amount, we move into the final stage of the process which is the repayment of the debt. Again, this will depend on the repayment arrangement that you signed or agreed to when you agreed to the terms and conditions as included in the application process.
Types of Consumer Loans
There are different loans that fall under this category of credit facilities known as consumer loans. We will now look at some of these in this section.
Personal Loans
This type of loan is given to individuals for a variety of purposes. It can be used for travel expenses, home improvement, debt consolidation, etc. For this type of loan, how much you will be given and the terms of the loan will be dependent mainly on your credit score and a few other factors.
Auto Loans
As the name suggests, this type of loan is given to finance the purchase of a vehicle. In most cases, the purchased car is used as collateral for the loan. This means that the lender can repossess the car if the loan is not repaid.
Mortgage Loan
Mortgages are given specifically for the purchase of real estate. As with auto loan, a mortgage loan is secured with the financed property. This means that, in the event of default in repayment, the lender can recover their funds by repossessing the home through a process called foreclosure.
Credit Cards
This is a type of loan classified as a revolving credit. A card hold is given access to an amount, also known as a credit limit, from which payments, purchases and withdrawals can be made. The card holder can carry out any number of transactions with the card so long as they remain within the credit limit. Once this limit is reached, no further transactions will be possible until repayment is made.
Payday Loans
This is a type of loan specifically given to people who earn a paycheck. Funds that are given under this category of loans have to be repaid at the next payday. They are therefore very short-termed loans that also have high interest rates.
Lines of Credit
This type of loan is similar to a credit card in that they both have credit limits. A line of credit offers the holder access to a specific amount of money. These funds can be accessed at any time and as often as desired until it is exhausted. These funds are expected to be repaid within a given period and when they are repaid, the accessible amount is reset to the original amount approved for the line of credit.
How to Find Affordable Consumer Loans
Finding affordable consumer loans requires that you take certain steps. Let’s quickly look at some of these steps.
1. Check Your Credit Score
Since most consumer loans are unsecured loans, your credit score plays a very important role in determining whether or not your application will be approved and even the terms on which the loans will be given to you if approved. You should therefore take some time to check your credit score before applying.
You may not be able to carry out enough transactions to impact your credit score right away, especially if you intend to apply for the loan immediately. However, you may be able to find some errors that, if corrected, can help improve your score. Your goal here is to see if there are any errors that may be having a negative impact on your score.
If however, you do not intend to apply for the loan immediately, you can begin to take proactive steps to improve your credit score. You can do this by paying off your credit card debts and paying your bills in a timely manner and in full.
2. Compare Lenders and their Offers
There are many different financial institutions that will offer you all or some of the different types of consumer loans mentioned above. This will include banks, online lenders and credit unions. It is important that you compare these offers, focusing on factors such as their terms and conditions, interest rate and other associated fees.
You should also look out for lenders that are offering discounts or running some kind of promotion that will reduce the cost of the loan to you. The goal is to find any combination of factors that will result in an affordable offer. This will include negotiating with the lender. Some lenders will be open to such negotiations.
3. Try Secured Loans
If you own items of value and will be willing to put them up as collateral, you will be able to enjoy lower rates. Generally, secured loans are given at lower rates. This is because the lender’s risk of losing their money to non-payment is massively reduced. The item put up as collateral will usually be something with a value equal to or higher than the amount to be repaid, so the lender can afford to offer very low rates.
4. Use a Co-signer
If you do not have a good score, one way to remedy this and reduce your rate is by using a co-signer. This is someone who has a high credit score and is willing to act as the borrower of the loan with you. Should you fail to make your repayments, the co-signer will be obligated to make the payments on your behalf.
5. Try Alternative Lending Sources
Aside from the traditional lenders, banks, online lenders and the like, there are a few alternative options that you can consider. Aside from trying to get funds from family and friends, you can also try peer-2-peer lending platforms. You may be able to get more favorable loan offers here.
Another good alternative source to look for is government lending programs. If you can find one lending program funded by the government, you will be able to get the best rates.
How to Manage Your Consumer Loan Effectively
Now that you’ve gotten your loan approved and disbursed, it’s important that you know exactly how to get the most from the experience. There are a few important things that you need to do to ensure that you have a good loan experience and we’ll be discussing them now.
Create a Budget and Stick to it
It’s important that you plan your repayment even before you get the loan. To do this, you need have a budget that factors in your income and expenses so you can effectively make room for your repayments. Prompt payment improves your credit rating and also saves you additional cost.
Having a budget can also help you make proper use of the borrowed funds. If you carefully plan how the funds will be spent, you’ll be less likely waste the funds on expenses outside of your primary reason for getting the loan.
Make Your Repayment Promptly
We already mentioned this briefly above. It’s important that you make your repayments as at when due and in full. Aside from its effect on your credit rating, some lenders will charge extra for late payments and you do not want this.
Conclusion
Consumer loans can be very helpful, especially when you need emergency funds. In this article, we’ve taken some time to explain exactly how this loan operates and how you can ensure you get the most affordable offer. If some things are still unclear, you can discuss with your financial advisor for professional guidance.
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