Taking out a loan could give you and your family peace of mind, but there are a few things you need to know before you decide to borrow.
“Before you approach any lenders, ask yourself these two questions: Why do I need the money? And how do I plan to pay it back?” advises Kevin Yu, Branch Manager at Popular Community Bank. Whether you’re applying for a loan to consolidate current debts, or to help with the cost of life-changing events like going to college or the birth of a child, you should make sure you understand what kind of loan is best for you and your financial situation.
What kinds of loans are available?
Loans fall into two main categories: secured and unsecured. “Secured loans mean that the money you are borrowing has some kind of collateral that can be drawn on if you are unable to make payments,” Yu explains. That means if you have taken out an auto loan from your bank for a new car, but don’t stay current with your payments, the bank may take your car as a form of repayment. Secured loans generally have a fixed interest rate and repayment time.
Unsecured loans are typically the kind that fit in your wallet: credit cards. The balance on unsecured loans can be carried from month to month and the interest rate may change. “Approval for unsecured loans and the amount of credit you will be offered is based largely on your credit score,” Yu explains.
Credit helps you get what you need, when you need it
Having access to credit is important because it can help you take care of financial emergencies quickly. As many New York and New Jersey residents are finding out, being able to quickly get a loan from their bank can be a tremendous help in getting back on their feet after events like Superstorm Sandy.
“We work with people to determine what their needs are, and their ability to repay the loan. Qualified individuals may be able to get their personal loan approved in as few as 24 or 48 hours. They will then have access to that money right away to help with things like clean-up or rebuilding costs,” Yu says. That’s in addition to help they may receive from state or federal agencies.
Yu cautions, however, that just because you can get credit doesn’t mean you need to use it. “Borrowing money can be simple but it can also put a strain on your finances if you aren’t careful,” he says. Make sure that if you’re using credit for an emergency it is a true emergency and not because you “need” the latest electronic gadget the first day it comes out.
Budget for borrowing
When it comes to paying back your loan or paying off the balance on your credit card, Yu says the best thing to do is add the payment into your household budget and make sure you always pay the bill on time.
“Listening before we lend is very important, “ Yu says. “It’s how we make sure we are connecting people with the right tools for their situation.” Lenders want to help people pay for college, buy a home or get back on their feet, but, he adds, “we need to be sure we are lending responsibly and making sure our customers understand the benefits and obligations.”
This article also appears on PopularTips.com.