I want to take a loan. Which one to choose?

We understand what loans and loans are.

Whatever the situation, because of which you decided to borrow, you need to be sure that you can repay it. The choice of a loan or loan depends on what you are going to spend money on and how much you need for this. It depends on the goal, which loan conditions will suit you. The amount you need and how much you will be able to pay per month depends on the period in which you repay the loan. All these parameters determine the choice.

Where to apply for money?

You can get a loan from a bank or a loan from a microfinance organization (MFO), a consumer credit cooperative (CPC) or a pawnshop. All these organizations lend money at interest.

But there are differences between a loan and a loan.

If you urgently need a small amount for a short time, it may be more convenient to take a loan. But the interest rates on loans are usually higher than on loans. It may be worth taking the time and trying to apply for a loan from a bank.

Take a targeted or non-targeted loan?

A targeted loan or loan is taken for the purchase of something specific - real estate, a car, household appliances.

A non–targeted loan or loan can be spent on anything - on vacation, treatment or repairs. Usually the bid on it is higher than on the target one.

For serious purchases, there are special types of targeted loans – for example, mortgage and car loans. Such loans are distinguished by large amounts and terms, and the rates are usually more profitable than for non-targeted consumer loans and loans. But there are also many requirements for the borrower. It is necessary not only to confirm income and employment. As a rule, the lender requires additional guarantees that the debt will be repaid. These guarantees are also called loan collateral.

What kind of software may be needed?

The Bank and the MFI may require a pledge, a guarantee or the participation of a co-borrower.

Collateral is your property, which can be taken away to repay the debt if you do not pay off the loan. For example, real estate purchased with a mortgage will have to be insured and left as collateral.

The guarantor undertakes to pay the debt for you if you yourself find yourself unable to do so. But then he may demand that you reimburse him for his expenses.

The co-borrower takes the loan together with you and bears the same responsibility for its repayment as you do. Usually co-borrowers are attracted when it comes to a large sum, and one person's income is not enough to pay such a loan.

Loans and loans with collateral or surety are called secured. The rates for them are usually lower than for unsecured ones.

According to what schedule to repay the debt?

Loans for a couple of weeks or months are usually repaid in one amount at the end of the contract term. Longer loans and borrowings usually involve monthly payments. They come in two types:

  1.  Differentiated payments. The amount you need on credit is the principal debt. It is divided into equal parts, which you will pay monthly throughout the entire term of the loan. But more interest will be added to them on the balance of the debt, since every month your principal debt decreases, interest becomes less and the payment decreases. In the first month you will need to deposit the largest amount, and in the last — the smallest.
  2.  Annuity payments. The amount of the monthly payment does not change throughout the time. At first, a significant part of it is interest, but by the end of the loan term, the proportion changes – and most of the payment goes to repay the principal. With an annuity schedule, it is more convenient to plan your budget. But in the end, the overpayment will be more than with differentiated payments.
  3.  A special repayment schedule is typical for credit cards. For example, two or three months may be a grace period: pay back the debt in this period - and interest will not be charged at all. If you do not meet the deadline, you will need to make a monthly minimum payment: let's say 5% of the balance of the principal debt and the interest accrued on it.

So which loan to choose?

First, determine the purpose, amount and term of the loan. Think about whether you can confirm the income, provide collateral, attract a guarantor or co-borrower.

Explore different options and choose the best offer for yourself. Do not forget to find out the full cost of the loan or loan with all interest and payments, including for additional services.

Try to ensure that payments on all loans and loans do not exceed 30% of your monthly income. Otherwise, there is a risk of not coping with the credit load and ending up in a debt pit or losing collateral.

Carefully read the loan or loan documents before signing them.

Before contacting a financial institution, be sure to make sure that it works legally.