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Understanding How Loans Work

A loan is a debt instrument which involves the transfer of financial assets from the lender to a borrower. Loans are usually covered by a specific period of time. The borrower (also called the principal) borrows a certain amount from the lender who will provide the repayment terms. The loan terms include the original amount borrowed plus the interest rates and fees applied to the debt. Repayments are usually made by monthly installment of the same amount until the sum owed is fully paid. Loans are available through different financial institutions such as banks, lenders and loan brokers.

Secured loans

A secured loan requires a form of collateral, such as a property or vehicle, for the loan to be approved. A mortgage loan is an example of a secured loan and one of the most common. The borrower’s home (or property) will be used to secure the loan, thus if the borrower fails to make the necessary repayments, the lender will have the right to seize and sell the property. This is how the lender gets the borrowed money back.

Unsecured loans

An unsecured loan is a form of credit that does not need any form of collateral in order for the loan to be granted. Examples of unsecured loans issued to a borrower: credit card, personal loan, corporate bond and a personal line of credit. The interest rates and fees of unsecured loans are usually high and will be based on the lender’s discernment. Different financial institutions and firms are authorized to offer unsecured loans.

Using 50-Cash Loans for Debt Consolidation

If you have some standing loans, getting the repayments done on time and keeping track of each of them can be quite confusing. Add to that the fact that you are paying different interest rates and fees for each of these loans. It is a good thing that you can actually use another loan to combine all these debts together and then pay it off as just one single loan.

Debt consolidation

This typically involves taking out a single loan in order to pay existing, usually smaller loans. Making one single payment every month might make it easier for you to take control of your financial situation. It is easier to keep track too and since you are paying only a single interest for the loan, you might be saving some cash in the process.

You may sign up for a secured debt consolidation where the loan you take out has collateral guaranteeing it such as a house or a car. This is one way of increasing the chances of the debt consolidation loan to be approved. If you default on the repayments, however, the lender will take the collateral in order to settle the debt.

You can also get an unsecured debt consolidation loan. While you do not risk losing collateral in this arrangement, you might get subjected to higher interest rates as a result, and getting approved for one would bank heavily on your credit score- which may no longer be that high since you already have an existing loan.

Advantages of debt consolidation loans

You get only one easy payment every month, instead of being constantly harangued with keeping up with different due dates monthly, you only need to pay for a single debt. This means being able to keep track of things as well as ensuring that you pay it without fail. Making multiple payments every month can also hit you with huge interest rates if you miss payments so consolidating is certainly more practical.

Your credit score will not get hit as well. Since you are only making one single payment every month you won’t have to worry about ever missing it. If you will take the effort to keep up with the payments on a timely manner, you can expect that it is going to have a huge positive effect on your credit score.

Possible disadvantages

Debt consolidation may not always be accessible to every borrower. Most of the time, lenders will only approve loan applications when there is collateral present. So, if you do not have valuable assets that can be used for this purpose, your application might just get rejected.

Debt relief is not assured either. You have to understand that you are merely combining your debt into one, easily manageable loan. You are not going to be debt-free, but you do have better control over your debt when you do consolidate it.