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Consumer Loans

Everything You Wanted to Know About Consumer Loans

A consumer is a person who purchases goods and services for personal use. Basically, everyone. You are a consumer. I am a consumer. You will be hard pressed to meet a person that doesn’t fall into this category. So who do you acquire a loan from? Loan providers are institutions, private or otherwise, that give access to funds in order to assist consumers in the purchase of a typically larger item which they do not have the funds to procure at the present. A consumer loan is traditionally used for the purchase of a vehicle or house but can also be used to consolidate credit cards, an expensive vacation, holiday gift buying and other personal expenses. We will go over what you should know before applying for a consumer loan, the different types of consumer loans and their purposes, and how to choose a loan provider.

What You Should Know Before Applying for a Loan

You’ve decided to finance a large purchase. Many people have come to this conclusion but you want to be well informed. Here are a few things you should know before submitting an application.

Monthly Payment

Take the time to go over your personal and household finances. You want to know your budget before you go to a loan provider to borrow funds (don’t worry we will go over how to pick the right provider for you later). This will require some quick calculations. It’s ok to use a calculator, no one will judge you. Use your “take home” or net income as opposed to gross income which is typically asked for on a loan application. Subtract all of your monthly expenses. That includes rent, groceries, cable, internet, gym fees, and so on. What you have left over will determine what monthly payment you can afford for your purchase. Remember, you know your finances better than anyone. If you don’t feel comfortable with a monthly payment then don’t sign on the dotted line.

If you don’t feel comfortable with a monthly payment then don’t sign on the dotted line.

Know Your Credit Score

It is important to know the buying power that you have. Your credit score determines your creditworthiness to a financial institution. In other words, it represents how suitable you are to receive a loan. Your credit score tells them how long your credit history is and if you have a clean history of making on-time payments or a history of late payments. Credit scores range from very poor (around 300) to excellent (800+). Learn more by checking out our blog post Know Your Credit Score.

Risk Based Lending

When reviewing a consumer loan application more loan providers use a practice called Risk Based lending. This is a benefit to the consumer. Instead of simply looking at a credit score range, the loan provider looks at the whole picture. That does include the credit score but also the credit history, whether it is long or short and currently in good standing, the debt to income ratio, and length of employment to determine a consumer’s creditworthiness.

Secured vs Unsecured Loans

The most common types of secured loans are car loans and mortgages. There is collateral or something pledged as security for repayment of the loan to be forfeited in the event of a default. For example in a car loan the vehicle being purchased is also the collateral for the loan. The lending provider will be listed as  having a lien or right to the vehicle until the loan has been paid in full and the lien is discharged. Subsequently, an unsecured loan does not have any collateral protection. If you default on an unsecured loan the lending provider cannot automatically take your property since nothing was provided. The most common types of unsecured loans are credit cards, student loans, and personal loans.

Consumer Loan Options

As we have mentioned, almost everyone falls under the moniker of consumer. The same goes for consumer loans. A consumer loan is when a person borrows money from a lender, either unsecured or secured, to make a purchase. Home loans are a bit more complicated and have earned their own category. Home loans include mortgages, second mortgages, equity loans or home equity lines of credit, construction loans and an in-depth look can be found here (link to home loans pillar page). Let’s review the other common consumer loans.

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Car Loans

If you are looking to purchase a new or used vehicle you may need a car loan. Along with researching which vehicle would be the best fit for your needs, make sure the price will fit your budget as well. Use an online auto loan calculator to compute how much you can afford for a vehicle. Important: don’t forget to factor in other monthly expenses for a car. For instance; vehicle insurance, gas, and maintenance like regular oil changes, tires, and brakes to name a few. The upkeep of your vehicle is just as important as being able to make the monthly loan payment.

Next you will want to research interest rates being offered by loan providers as well as terms, such as 12 months, 36 months, etc., in regards to how long you will have to pay the loan back. A 1% interest rate may seem great but if you only have 12 months to pay it back then that might not be the best situation for you depending how much you are borrowing.

A cash down payment for your purchase can go a long way depending on how significant of an amount you have. A down payment can mean you need to borrow less money, you don’t need to borrow 100% of the value of the vehicle, and is a good way to offset other costs like sales tax and registration of the vehicle. If you have an existing vehicle that you can use as a trade-in, where the dealership gives you credit towards a new vehicle based on the value of your current vehicle, you can get a pretty good deal. If you still have a lien on your current vehicle that will need to be paid off first and subtracted from whatever amount of credit the dealer was going to give you for your vehicle. It is possible to “roll-in” the amount owed if you owe more on your current auto loan than what the dealership is willing to give you for your trade-in. It all depends on what the value of the vehicle you are purchasing is. You may end up borrowing more than 100% of the value of the purchase vehicle. This is a common practice but be aware you will be considered upside down on your loan. Meaning that you owe more than what the vehicle is worth. This becomes an issue if you are in an accident and the vehicle is deemed a total loss in which case you will have to pay the difference or you go to trade in that vehicle creating a cycle of always being upside down on your loan. Best to speak with a loan specialist if you think you may be in this type of situation.

Personal Loans

A personal loan is funds granted to a consumer for personal use. So what is the difference between a personal loan and an auto loan? A personal loan is unsecured. That means there is no collateral involved like with an auto loan. A personal loan is given based on the borrower’s ability to pay back the loan. This is where risk based lending comes into play again. The borrower’s history will be looked at as well as the credit score. A loan underwriter will also ask for the intention of the funds. That means you can’t just use the funds for anything. There needs to be a purpose. Make sure to inquire with the lender before applying. 

Here are some acceptable purposes:

  • Debt consolidation. Multiple unsecured debts paid off with one loan combining them all into one payment each month. This is a practice used typically to pay off credit cards to pay them down faster and with a lower interest rate and possibly a lower monthly payment then paying multiple creditors. Having a fixed term also helps budgeting and financial planning by knowing when the debt will be paid. Since credit cards are an open ended line of credit it makes it difficult to know when they will be paid in full. Most lenders will not consolidate a secured loan into an unsecured loan like a personal loan since that means they will be losing the collateral associated with that original loan.
  • Home Improvement. If you are looking to do a smaller project on your home a personal loan may be for you. Home equity loans can have a high minimum amount to borrow and may be way above the budget you are looking for. A lender may require copies of any documents with a contractor of if you are doing it yourself, a list of materials you will be purchasing.
  • Vacation. Though not as popular anymore with the emergence of Travel Rewards credit cards, a personal loan could be used for vacation expenses.
  • Holiday Spending. An alternative to using credit cards, a personal gives you a fixed budget, lower interest rate, and flexible terms to pay off before the next holiday season.

A personal loan can offer lower interest rates than a credit card and flexible terms to help make a more manageable monthly payment.

A personal loan can offer lower interest rates than a credit card and flexible terms to help make a more manageable monthly payment. Being unsecured, a personal can prove harder to obtain and will require more stringent consideration on the lender’s part. Keep that in mind when applying. A co-borrower may be required to sign with you. For consolidation of credit cards it may be required that you close out the credit cards you are paying off as to not be able to create more debt while trying to payoff what got you into a predicament in the first place. Do not consider a personal loan as a “fix-all.” You still need to be able to pay the loan back. It is a tool to help you get to a better financial position in the future. Speak with a loan specialist before applying to make sure this is the best course of action for you. What worked for someone else may not be the solution for you.

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Credit Cards

A credit card is issued by a financial company to allow it’s cardholder to borrow funds to purchase goods and services. The money is paid back with interest each statement period (typically on a monthly basis) as well any fees associated with the card. A credit card is basically a short-term loan to make purchases. Some creditors will also allow cash advances to be made usually with an extra fee imposed on top of the interest rate. Credit cards have become one of the most common ways for consumers to make purchases.

There are credit cards that offer perks and rewards  for opening and using a line of credit with that creditor. Travel rewards cards have become a staple in a creditor’s portfolio. Offering money back or points towards travel enticing the avid traveler to use that particular card. This can be a benefit to anyone that travels frequently offsetting costs by booking their trip using a credit card. Some cards will have requirements to meet before you start accruing any reward points. For instance, a minimum amount charged during a required time frame. Make sure to read all disclosures before signing for a card agreement. If you can’t meet the standard requirements then it may not be worth getting that card and possibly have to face fees applied to your card. Alternatively there are simpler cards that are very straight forward. They may not have the level of perks and rewards others do but they might fit your needs just fine.

Store credit cards are their own category. Many offer a percentage off of your purchase for signing up that day. The problem is that store cards tend to have the highest interest rates. If you chose to take advantage of their offer make sure you have the funds to pay the card down to zero when you receive your bill.

An important thing to remember about credit cards is they aren’t free money. They are advances or credit designed to be paid back with interest. Conveniently credit cards will give you a minimum amount to pay at the end of each statement cycle depending on how much you have spent. This amount will cover the interest you have accrued and not much of the principal.

Using a credit card as a safety net: if you know you can’t handle having a credit card without racking up unnecessary debt, but want one for emergencies, keep it locked up in a safe place where you know you will be less likely to reach for it to buy a new outfit or try a new restaurant.

Many credit unions and banks offer credit cards as well as big name providers.

Which card to choose? Many credit unions and banks offer credit cards as well as big name providers. Make sure to review rates, rewards, and terms of special offers. Be diligent in your research. Don’t let there be any surprises in your statement each month. There are plenty of providers to choose from so choose one that works for you.

Student Loans

Welcome to adulthood. One of the first loans you’ll encounter as an adult will be a student loan. A student loan is a loan to help pay for undergraduate and graduate level schooling. It can cover tuition, room and board, books, supplies, and living expenses.

A student loan is basically inevitable for anyone looking to attend a 4 year school. It is imperative to exhaust all avenues for payment before applying. Begin by applying for Free Application for Federal Student Aid (FAFSA). This is a form filled out by students to find out if they are eligible for government sponsored financial aid to attend a college or university in the United States. This includes grants, which do not need to be paid back, work study programs, as well as loans. Government student loans tend to have lower interest rates and slightly more flexible repayment terms.

Student Loan Types

Federal loans are backed by the government and have terms and conditions set by law. There are many benefits like fixed interest rates, forbearance terms, and income based repayment plans. Eligibility for federal loans can only be determined by filling out a FAFSA form. It is important to apply for FAFSA as soon as possible since federal funds each year are limited and become less available the longer you wait.

It is important to apply for FAFSA as soon as possible since federal funds each year are limited and become less available the longer you wait.

Private loans are generally more expensive with higher interest rates and repayment plans based on the lender’s policies. There are affordable choices provided by private lenders with the borrower in mind instead of profits so do not rule them out completely. Do your research and comprehend completely what you are getting into before signing on any agreement.

Choosing a Student Loan Provider

After filing your FAFSA application and applying for scholarships and grants you may still need to apply for a student loan. There are a plethora of private lenders for you to choose from. A Google search will come up with big bank names and top student loan providers. What may not immediately come up is your local credit union. That’s right, credit unions are an untapped student loan resource.

Other Alternatives:
  • Scholarships. Many communities will offer their own scholarships for students to attend higher education. Be diligent in your searching. Speak with your schools guidance counselor, scour the internet, and apply anywhere you are eligible. Scholarships are not meant to be paid back but they may have requirements and stipulations to receive the money like maintaining a certain Grade Point Average, or taking a particular major. Read carefully.
  • Grants. Besides government grants ascertained by FAFSA there may be local grants that you can apply for. Leave no stone unturned.
  • Associates Degree. Attending a community college for the first two years of higher education is a way to save money. A community college will have lower costs for tuition and transferable credit if you wish to move on to complete a bachelor’s degree. This would allow you to save money on tuition as well as room and board and allow you to work part time or full time. Plus, having a two-year higher education credential is better than none!
Refinance and Consolidation

Refinancing and consolidation are two options for your student loans. Understanding each option will help you make the right decision.

A Direct Consolidation Loan from the federal government allows you to consolidate (combine) multiple federal education loans into one loan. The result is a single monthly payment for your federal student loans at one interest rate instead of multiple payments.

Refinancing your student loans involves working with a private lender like your credit union. This lender will pay off your existing loans (which may include private and federal loans) and combine them through consolidation. You will then make a single loan payment to the new private lender.

What to Look For

Before signing a loan contract it is important to understand what you are getting into. The number one thing everyone thinks about is the interest rate. By doing a little online research you can compare interest rates. They will be competitive with each other so what else should you look for?

  • Repayment options.
    • Deferment. It is important to know what you options are when it comes to repaying your student loan. Make sure you know when repayment begins. Most loan providers will not require a payment while you are considered a full time student until you have graduated or are no longer a full time student. This period of time is called deferment. There could be other requirements that would qualify you based on the lender’s policies.
    • Forbearance. If you do not qualify for a deferment perhaps a forbearance will be granted. This would be at your lender’s discretion and could mean interest only payments or extended time to your loan term. Use this as a last resort as there may be monetary repercussions and length of loan.
  • Funds. How long will it take to receive your funds? Who do they go to? Especially if you have included expenses for books and other expenses outside of tuition.
  • Comprehension. How easy is it for you to understand the terms and conditions of the loan? It is important to have a full grasp of what you are signing for. If you don’t, make sure to speak with a specialist. There should be no ambiguity.
  • Loan vs Line of Credit.
    • A loan is a fixed amount given, typically a school year at a time, where you would have to apply each year based off of your needs.
    • A line of credit is an amount that you would draw off of each year to supplement the amount you need after any aid you get from your FAFSA application.

We have gone over what you should know before applying for a consumer loan: credit score, risk based lending, secured vs unsecured, consumer loan types: auto loans, personal loans, credit cards, student loans, and what to look for in a loan provider. All of these products and services are provided by Workers Credit Union. If you would like to know more feel free to schedule an appointment at your local branch or visit our website. You may find that a credit union not only has competitive rates but that the service is unmatched.

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