Consumer loans are funds intended to finance specific consumer needs like purchasing a home, education, and debt consolidation, among others.
Likewise, you can use the money borrowed as capital to finance a small business, purchase equipment, or for inventory purposes. In other words, there are a variety of things you can do with these funds.
However, borrowers are expected to identify their specific needs before opting for a particular product. In this article, we will briefly discuss consumer loans. You can also check out this Forbrukslån Guide for more info.
Types of Consumer Loans
These types are normally given to the lender at a go and then the lender is expected to pay the loan plus interests in installments. Here are some of the most popular installment loans available.
- Student Loans
Federal student loans are more popular since they have a fixed interest rate and are paid only after graduation. One can choose to get either a subsidized loan or an unsubsidized loan.
Subsidized loans are designed for extremely needy students while the federal unsubsidized ones are meant for average student borrowers.
The government takes the liability of the interests accrued on subsidized loans until the student clears school. However, the interest rates for federal loans are similar for all borrowers.
Mortgages come in handy for consumers who cannot finance home purchases with their average income. They are designed to simplify home buying and make it more accessible.
The mortgage loan payment is spread across several years, approximately 30 years, to make it easier for average consumers.
Mortgages are classified into three major categories, FHA Loans which are for low credit or low-income individuals, conventional mortgages backed by Freddie Mac and Fannie Mae, and VA loans which are designed for veterans.
- Auto Loans
Car financing is growing popular by the day. You can use the money borrowed to purchase either a new or used car. The terms typically range from 24 to 60 months, while the longest is approximately 72 or 84 months.
Since older vehicles are considered riskier to finance, lenders may limit the term duration to around 48 or 60 months. This is because, unlike home value, car value usually declines over time.
Plus, the lenders generally use the financed vehicle as collateral. As such, they need to make sure that it can cover their losses in case the borrower defaults.
- Personal Loans
Personalized loans are more versatile unlike mortgages, student or car loans that are borrowed for a specific purpose. Personal loans can be used for credit building, vacations or to finance day-to-day expenses.
The terms also vary but the length is normally under 10 years. If you have an existing credit card debt you can borrow a certain amount to pay down the debt. Credit card interest can accumulate rapidly if you take too long to pay the balance off.
Categories of Consumer Loan
The two major categories of consumer loans include closed-end and open-end loans.
- Closed-end loan
These funds are designed for financing specific things like cars or homes. The money is generally availed in a lump sum so that the borrower can purchase their intended items. In case the debtor defaults on payment, the creditor has the right to possess the item and use it to clear the remaining debt. The entire loan and interest must be repaid at a given date without fail.
- Open-end loan
Here the borrower can use the borrowed money to finance almost anything. Open-end loans have no specific payback period as long as the consumer promises to repay the debt promptly.
Typically, the terms of payment are based on an individual’s credit score. They include debit cards, home equity lines of credit (HELOC), and credit card accounts. These types of loans are also known as revolving credit.
Who is Eligible for Consumer Loans?
One must be 21 years and above to qualify for a consumer loan. One must also have a steady source of income. For salaried individuals, the maximum age limit is 60 years while self-employed individuals can go up to 65 years. However, this may vary from bank to bank depending on your credit score.
The benefits are wide since one can easily access the funds any time whenever a need arises. Consumers can access items far beyond their earning ability. The interest rates are also easily manageable and versatile. Plus, the loan approval process is fast.
Individuals with financial difficulties can now own homes or purchase vehicles with ease thanks to consumer loans. In fact, you don’t have to have a very high credit score to access these funds. Thus, if these loans are used in moderation, they can be a great privilege for those with low income. Nevertheless, you must be 21 and over to acquire these funds and possess at least some income.