Many young people make the mistake of viewing loans as free money. Loans are not the same as grants or scholarships; it is essentially your money that you are borrowing in the future. This is why credit can be so important, as some lenders won’t trust you to borrow money if they see no source of money in your future and have no record of money from your past. .
Traditionally, this has made it more difficult for young people to obtain loans: they have had less time to prove their financial responsibility and they generally have less collateral to offer to lenders.
Student loans, of course, are quite easy to obtain because they are offered knowing that it will probably take longer to pay them off. Student loans count against your credit and are considered good credit score builders because you can pay them back for decades if needed. But not all loans count towards your credit score.
If you have a limited credit history and need a loan, it may be a good idea to find one that will be reported to the three major credit agencies. Especially a secured personal loan with a lower APR that gives you a longer repayment period. Although you must provide collateral (car, co-signer with deed, etc.) for a secured loan, it is considered a lower risk investment and generally carries lower rates.
Every time you make a payment on a loan like this, you get positive marks on your credit report. These are the types of personal loans that no credit history can spoil.
A secured loan is just one of four main types of personal loans. Before taking out a loan you should make sure you are familiar with the terms and conditions as there are usually stiff penalties for backing down or trying to change things later.
The other three types of personal loans are:
Unsecured Personal Loans
Unsecured personal loans do not require collateral, but you will need a good credit history. In fact, unsecured loans are pretty much based solely on your credit score. But because these are considered riskier investments for lenders (they have no collateral to fall back on if you can’t make your payments), they generally vet the borrower more strictly and charge higher rates. higher interest. There are many variations of an unsecured loan, but they all involve some level of using credit history instead of collateral.
Fixed rate loans
Fixed rate loans are loans where interest and monthly payments remain fixed and do not fluctuate with economic forces, which can sometimes cause interest rates to fluctuate. Of course, this can also be a downside, as sometimes interest rates can drop and provide the borrower with an unexpected windfall.
However, while you won’t benefit from a falling rate, you will also benefit from a stable guaranteed monthly amount, which can make financial planning and budgeting easier. Many new homeowners take out fixed rate loans so they can carefully chart their monthly expenses without too many unknown variables.
Variable rate loans
Variable rate loans are the flip side of fixed rate loans, with interest rates that can rise or fall depending on the economic winds of the moment (although there is usually some sort of cap). These loans usually come with a lower monthly APR, but if interest rates go up, you may end up paying more in any given month. College is a good time to build up your credit so that when the time comes, you can apply for personal loans and business loans. People don’t buy homes or start businesses overnight; these each require different types of loans with different terms and rates. And without collateral or a credit history, getting a large loan is very difficult. Also, be careful who you borrow money from and research the company or organization thoroughly. They are not the only ones taking a financial risk: more than a few people have had to untangle complicated financial situations because of bad or toxic loans.