Things You Need To Know About Small Loans.
Have you heard of small loans before? Do you know what they are and how they work? Small loans are a type of personal loan that is usually not secured by any collateral. This means that the lender will give you the amount of money you need but won’t require you to give them your car or house as collateral. It is different from other types of loans which would usually require you to give collateral as a security for the loan the lender gives you. Small loans come in handy when you require money for emergencies or other unplanned events. Sometimes incidences happen and you find yourself in need of money.
Family and friends may not be in a position to help you in that moment. In some instances, you want to avoid embarrassing yourself. For this reason, lenders have come up with short loans to help you sort out your issues without having to involve everyone. Note that small loans are not meant to be used regularly, rather they are mostly used during emergencies. Below are some of the things you need to know about small loans.
What Are The Types Of Small Loans?
There are different categories of small loans. Some of them include payday loans, personal loans and line of credit loans.
1. Payday Loans:
This are the most common type of small loans. The lender allows you to borrow for up to a month and expects you to repay the entire loan and subsequent interest in a single instalment. You have probably heard of payday loans. These are different from instalment loans which allow you to repay the loan in two or more instalments.
The amount of interest you pay for the loan varies between lenders. This is why you need to do your research before taking a payday loan to ensure that you get a fair deal. There is no point in paying a lot of interest to a specific lender and yet there are other lenders charging lower interest rates. One rule of thumb is that borrowers should never pay more in interest and fees than the amount of money they borrow.
2. Small Personal Loans:
Small personal loans are usually borrowed over a longer period, mostly between 3 to 24 months. It gives you more time to repay the loan and the interest, making it more affordable. You will find that interest on personal loans is usually lower than interest on payday loans. However, since personal loans are taken over a long period, the cost of borrowing could be high. Also, with personal loans, there are fewer risks of defaulted payments because the monthly loan repayments tend to be lower than that of payday loans.
3. Revolving Credit:
This is also known as the line of credit loans. The lender basically offers you credit up to a certain limit. You are allowed to borrow any amount within the limit and repay the loan plus interest when you don’t need the money anymore. Some people use this option as an alternative to an unauthorised overdraft. Once you clear the credit and interest, you are allowed to borrow again. It basically functions similar to using a credit card. In case you need money fast, this option is a good one.
What Are The Features Of Small Loans?
1. Flexibility Of Use:
The good thing about small loans is that you are free to use the money the way you deem right. The lender has no control over how you will use the money as long as you repay the loan within the stipulated time. It is different from other types of loans such as home loans where the money you borrow can only be used to buy property. With small loans, you are not limited in any way meaning that you get to sort out your issues without having to explain how you spent the money to the lender. The lender doesn’t care whether you use the money for medical bills or for home renovations.
2. No Collateral:
Do you know how relieving it is to not have a lender ask you for security? A small loan is usually unsecured in that the lender doesn’t expect you to give shares, or any other asset as a collateral for the loan. This quality makes small loans attractive to people who don’t have anything to give as collateral. Not everyone can actually afford to have some security on them. In case you have some assets with you, you get peace of mind knowing that your assets are not at risk of being liquidated by the lender.
Small loans have a predictable repayment schedule. This is great because you get to know how much you are expected to pay, and by which date. This allows you to prepare and plan yourself in advance. There is clarity, and this makes it dependable. Some types of loans such as credit cards are not predictable because factors such as interest rate may change based on changes in the market. The only thing that remains constant is the repayment date and the principal.
Some Of The Reasons To Take Small Loans:
It is normal to run out of cash sometimes. There are reasons that may push you to seek out a small loan. Below are some of those reasons.
1. To Improve Your Credit:
It might seem funny that some people actually take out a loan to help improve their credit score. However, this actually happens. When credit bureaus actually calculate your credit score, they look at a combination of revolving credit for example instalment loans and credit cards. If you take a personal loan for example and repay your debts in time, your credit score goes up. Lenders will always look at your credit history to see whether you repay your loans in time. Don’t delay to pay that crucial loan just because you don’t have money. Get a small loan and improve your credit score.
2. Take A Vacation:
Going for a vacation requires a lot of money. Sometimes you may find that your expenses have exceeded the budget you had set. You could always take out a personal loan to cover your expenses. You don’t need to go around borrowing people money when you are on vacation. It doesn’t, matter whether you need money for food or airfare. You can always take out a small loan as long as you have a way of repaying the money in time.
3. Personal Events:
When you are planning an event such as your wedding or anniversary, you may find that you need a lot of money, including precautionary money. Don’t host a mediocre event just because you don’t have enough money. Some of these events such as weddings are a once in a lifetime opportunity. You want to give yourselves the best wedding ever. Small loans provide a ready pool of cash to help you organise an excellent event.
Instances When A Small Loan My Not Be A Good Idea.
1. College Tuition:
Never get into the habit of paying your children’s tuition fees with small loans. It is completely uneconomical. It makes more sense to find student loans for financing a college education. These loans tend to have lower interest rates than the one charged on small loans. Besides, these loans don’t require the student to repay the loan until they have completed their studies. This gives you time to plan yourself. Besides, if the student completes their studies and finds a job, it becomes easier to repay the loan.
2. Financing A Car:
Financing a car with a small loan is an unwise move. Why not take an auto loan instead? These tend to charge lower interest rates as opposed to the small loans because the vehicle usually serves as security on the car loan. You really need to evaluate your needs when seeking a small loan. Don’t just take the loan for any purpose because you might be incurring huge interest rates, rather than saving.
What Should You Do To Increase Your Chances Of Getting A Small Loan?
Just like any other loan, you need to meet some requirements for the lender to consider you a potential borrower. If you just show up with a poor credit score and low income, the lender may dismiss you and reject to give you the small loan. Below are tips to help you get your small loan approved.
1. Credit Requirements:
When you are applying for an unsecured loan, your lender will definitely look at your credit. Each type of small loan will have its own minimum which you need to qualify. Even if you have a h2 credit and you fail to meet the lenders requirements, you may not get your loan approved. Ensure you clearly understand the requirements early enough before you even apply for the loan.
Reduce Your Outstanding Debts.
One thing that lenders will always look at is your debt to income ratio. This measures how much you can afford to borrow. It shows the borrower whether you are able to afford to repay the loan every month. If you have a high debt to income ratio, it means that you spend too much of your income paying off other debts. This is risky. If you calculate and realise that your debt to income ratio is high, it is advisable to pay off some of your debts first before applying for the loan. The lower the debt to income ratio, the higher the chances of you getting the small loan.
When you are applying for a small loan, it is always good to look at the income requirements given by the lender. Most lenders usually have a minimum income requirement. As much as small loans may not be the same with other types of loans, all lenders want to lend you money only if they know you will be able to pay.
No lender wants to risk their money with a borrower who is likely to default. This is why the income requirements are usually put in place meaning that if you haven’t met the minimum income requirements, you don’t make the cut. If you check the lender’s website and you don’t find any details of the income requirement, it is good to contact them.
Call and ask about their income requirements to know whether you meet them. If you don’t meet the requirements, don’t waste time trying because your loan won’t get approval. This is crucial because if you don’t have the income to pay, you will default on the loan repayment.
Small loans are great. They come in handy when you need to pay for unexpected expenses or emergencies. It is good to understand how they work, their characteristics as well as the requirements.
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