Buying a dream house or car is one of the main components of the American dream. There is only a small percentage of people who can buy their dream house or car without applying for a loan. Over the years, the personal loans have helped people realise their dreams and these loans have been used for rebuilding credit.
There are two types of personal loans- the secured and the unsecured loans. These loans enable the barrower to make the purchase and let him or her repay the money over fixed period of time. Home loans, student loans, car loans, home equity loans etc come under secured and unsecured loans.
As the name suggests, secure loans are those personal loans that are procured by placing one’s immovable assets and properties as collateral. The lender requires an assurance and security for providing the loan to the borrower. If the borrower fails to repay the loan, the lender can rely on the borrower’s collateral surety.
Some of the most common forms of secured loans are home mortgages, home equity loans or instalment loans.
When a borrower is applying for an unsecured loan, he or she is not required to place any collateral to procure the loan. Since these loans are not given the repayment guarantee, lenders place the highest interest rates. The interest rates for unsecured loans are higher than secured loans.
Credit cards and student loans are the common examples of unsecured loans.
During 1950s the secured loans especially mortgage debts to income ratio was 20-73 percent. And mortgage debt to assets ratio was found to be 15 to 41 percent. The secured loans were popularised by the interference of Federal Government. In early 1990s borrowers were offered numerous loan plans with variable interest rates and short maturities. People who owned houses renegotiated the mortgage debts annually.
The Federal Government’s involvement in mortgage industry paved way for Federal Housing Administration, the Federal National Mortgage Association and the Home Owner’s Loan Corporation. This time period also faced the “Great depression”. Due to this property values declined and a stable mortgage market was shaken. Borrowers defaulted on their debts when they faced refusal of lenders to refinance.
In 2000 and later years, the mortgage trend stabilised with numerous personalised loan plans and well trained investors.
Unsecured loans such as student loans were very popular during 2008 however due to Federal loan limits revision student loans plunged during late 2008- 2009. These loans had an annual volume of 25-30 percent. And they are still popular amongst student and may reach the peak in annual volume mark in the coming years.
From over past ten years, Secured loans are the main and biggest component of household loans in United States and they also form a big chunk of United States aggregate debt. The unsecured loans such as student loans and credit cards have decreased from 47 percent in 2000 to 31 percent in 2011.
Secured loans could be:
Mortgage is typically a loan borrowed to purchase a house. The mortgages have fixed and adjustable interest rates. Mortgage loans are lent by banks, thrift and credit agencies, mortgage brokers, home builders, real estate units or internet based units.
Two of the most borrowed instalment loans are home and car loans. Here, the borrower agrees to pay the debt over a period with structured repayment schedules.
It is a secured loan plan where in borrower’s home is used as collateral. Generally people opt for such loans to pay off medical, educational or home renovation expenses.
Unsecured loans could be:
The borrower uses the card credit for every purchase or service. Before the last date of billing cycle the borrower must pay the credit amount. Credit cards will have credit line which determines the purchasing power of the credit card holder.
Student loans are debts borrowed by students who aspire for higher education or completion of Post Grad program. These loans are either issued by Federal Government, colleges and universities or financial institutes and banks.
Secured loans are often touted as last resort options but one may consider these loans if:
Unsecured loans are considered to be affordable and bit safer than secured loans. Borrowers opt for unsecured loans because:
Those who have had a strained financial past who are planning to rebuild their credit scores can certainly consider unsecured loans. However not everyone who is looking to rebuild their credit scores can opt for these loans. They must consider the necessary factors to apply for a suitable loan plan.
Unsecured loans are easily obtained by those with low or poor credit scores but with a price, i.e. high interest rates. But once the repayment schedule is followed religiously, credit agencies upon receiving the repayment information can raise the borrower’s credit scores.
How can you reduce the high interest rate on an unsecured loan? The most creative way can be to reduce the total balance of debt by paying bigger repayment amounts than scheduled. This can happen only if the lender agrees to do so. Once the borrower starts clearing the loan amount by bigger chunks of repayment, after few months when he has successfully reduced the interest rate and loan balance he can slow down and pay in small amounts till the loan term. This can contribute toward a long positive credit history. And such credit history will improve the scores.
Personal loans have enabled millions of people across the country to buy their dream homes, cars, to pay for their higher education and regular purchases. Personal loans have come a long way from what they used to be in the last decade. Today secured loans make a big part of U.S aggregate debt. They rank high among middle class who dream big. These loans not only help people to realise their dreams but they also play a major role in maintaining one’s credit scores.
Unsecured loans can actually lift the poor credit scores. These loans are easily available but at a higher interest rates. A regular repayment of these loans can go a long way in maintenance of credit scores. On an average most of the households opt for personal loans for one or the other reason. However before applying for a suitable loan, they must consider various loan schemes offered by many financial institutions. They can compare various interest rates, and annual fees along with possible loan amount. Careful consideration of these factors can help people to procure suitable loans to realise their dreams. Secured and unsecured loans -Just as they can help fulfil dreams, re-build credit history, they can also threaten credit history if not managed effectively. Hence, personal loans should be carefully considered and cleverly managed.