If You Are A Fixed-Income Or Not What I Said When Should You Consider a Consumer Loan?

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When Should You Consider a Consumer Loan?

A consumer loan gives you the flexibility and opportunity to spend the money as you see fit. Unlike credit cards, these loans are usually supplied with a lower interest rate and longer payments.

Here we take a closer look at when it is appropriate to use a consumer loan, and vice versawhen it is not.

When a consumer loan can be the right form of financing?

An unsecured loan means that the borrower does not need to put up collateral for the loan. But the creditor(s) have other ways to get their money back, so it should not be misinterpreted.

These loans are a better fit for those with stable finances. In another sense; people with a fixed income and a low to moderate degree of household debt.

With a decent credit score you would also be rewarded with lower interest rates. That’s because the risk of default is lower, seen from the banks’ perspective.

Loan names are also prudent in those cases where there is no realistic way to guarantee the credit. For example, you would never finance your home that way (that’s why we have mortgages), but you may want to use it for other unsecured purchases.

Unsecured loans should also be used to finance durable goods. For example, to build a shelter where you can work on your hobby or a lawnmower that will last for many years.

What should it not be used for?

Here is a short list, and some items one should not finance with unsecured loans:

1. Fixed monthly expenses: Unless we’re talking about a one-time exception (say the washing machine broke down), you should never use it to cover your fixed monthly expenses.

If you cannot afford to pay these expenses every month, it is an indicator that your household budget is under great pressure. Borrowing money to pay bills will only add to the financial strain on your home.

2. Down payment on a mortgage: You should never finance the down payment requirement with anything but your own savings. There are several reasons for this, but the most important one has to do with the financial risks you are taking.

If interest rates were to rise (or if you lost your income), you would have a big problem covering the monthly mortgage bills. A name loan would only add stress to the situation.

Also, let’s not forget why banks have to require a down payment in the first place. So that you would take less of a financial chance when you sign for the mortgage.

3. Interest on other loans: This may seem obvious, but it should not be ignored. Never use a consumer loan to pay interest on other loans. You just push the problem in front of you, adding fuel to the fire.

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