Nowadays, there are many options for borrowing money. You can approach family and friends to ask if they will invest in your fledgling business. There are also credit unions, banks, and online lending companies that might lend your venture money. However, it's tough to obtain a loan if you have a less-than-stellar credit rating, especially if you're borrowing some quick cash for an emergency or an unexpected expense.
In such a case, you may consider a payday loan or online instalment loan. But before you apply for either of these loan types, it's crucial you understand the difference between the two.
What is an online instalment loan?
Instalment loans are the most accessible loan options today. It's a loan that you pay back with monthly payments over a specified period. Many online and traditional lenders offer these types of loan (you might know then by a different name). Personal loans, car loans, house loans, and student loans are all examples of an instalment loan.
Once you are approved for an instalment loan, you'll get the money as a lump sum. You then have to pay the principal and interest amount each month until you repay what you owe in full. You can visit this page to learn more on instalment loans.
Fixed-rate or variable-rate instalment loans
When you take out an instalment loan, you may be offered the loan with a variable interest rate or a fixed interest rate.
- An instalment loan with a variable interest rate means that your periodic payments may decrease or increase depending on the interest rate index. This type of loan is riskier because there's a certain unpredictability in it.
- A fixed-rate instalment loan means that your interest rate stays the same throughout the loan's term. It's the best option for borrowers who want certainty on how much they'll pay each month.
Secured or unsecured instalment loans
Some lenders may lend you money without requiring any collateral, while others may require you to provide a guarantee (perhaps in the form of an asset) as a security against the money you borrow.
- A secured instalment loan requires you to put up collateral before you can take out the loan. Car loans or home loans are good examples of secured instalment loans. If you fail to pay back what you owe on time, the lender can take possession of your car or house.
- Unsecured loans do not require you to provide security against your loan. This means the lender cannot seize your assets if you fall behind on your payments. However, your credit rating may be damaged if you don't pay back the money you've borrowed.
How to qualify for an instalment loan
Factors such as your credit score and income can either make or break your chances of getting an online instalment loan. It can also influence your borrowing limit and interest rate. Borrowers with the best credit scores can obtain instalment loans with interest rates of 3-6% annual percentage rates (APR).
If you haven't yet established your credit, or have a poor credit score, look for lenders that specialize in offering instalment loans to borrowers with no or bad credit profiles.
What is a payday loan?
Another type of loan that's often used by borrowers with no or poor credit scores is a payday loan. Payday loans typically have much shorter terms (usually a month or a matter weeks) and far higher interest rates than instalment loans (around 400-500%, although sometimes many times higher).
Your lender will ask for access to your bank account or request you provide a post-dated cheque before you are approved for this type of loan. Once the loan's term has ended, the lender will cash the cheque or withdraw the money from your bank account.
Lenders of payday loans typically impose fees rather than interests. For instance, for every £50 you borrow, there will be a £15 fee. You can take out £50 as a loan but you have to pay back £65.
The law requires lenders to tell you the loan's annual percentage rate, so that you can compare different lenders and pick the best loan product that fits your needs.
How to qualify for a payday loan
Most payday lenders don't conduct credit checks, but there are still some requirements that you must meet. For instance, you should be at least 18 years of age, have a regular job and sufficient income to reply the debt. It's also important that you do not have a poor credit rating (a history of bankruptcy, CCJs or unpaid debts).
If you have a bad credit rating and need to borrow some cash, consider taking out an instalment loans or payday loans. Make sure you understand the difference between the two and the charges and interest that you will have to repay so you pick the right one for your needs.
Copyright 2020. Featured post made possible by Bree Diaz