I Want to Take a Loan. Which One to Choose?

We explore the types of loans and credits.

No matter the situation that made you decide to borrow money, you need to be sure you can repay it. The choice of a loan or credit depends on what you plan to spend the money on and how much you need. The purpose determines the terms of the loan that will suit you. The amount needed and how much you can pay monthly determines the term in which you will repay the credit. All these parameters define your choice.

Where to Get Money?

You can get a credit from a bank, a loan from a microfinance organization, or a pawnshop. All these organizations lend money with interest.

If you urgently need a small amount for a short time, taking a loan might be more convenient. But interest rates on loans are usually higher than on bank credits. It might be worth spending some time trying to get a loan from a bank.

Targeted or Non-targeted Loan?

A targeted credit or loan is taken for purchasing something specific — real estate, a car, household appliances.

A non-targeted credit or loan can be spent on anything — vacation, medical treatment, or repair. Usually, its interest rate is higher than that of a targeted loan.

For major purchases, there are special types of targeted credits — for example, mortgage and car loans. Such loans have larger amounts and terms, and interest rates are usually more favorable than non-targeted consumer loans. However, requirements for the borrower are strict. It is necessary not only to confirm income and employment. Usually, the lender also requires additional guarantees that the debt will be repaid. These guarantees are also called collateral.

What Collateral Might Be Required?

Banks and microfinance organizations may require collateral, a guarantor, or a co-borrower.

Collateral is your property, which can be taken to repay the debt if you fail to pay. For example, real estate bought with a mortgage must be insured and left as collateral.

A guarantor undertakes to pay the debt for you if you are unable to do so yourself. Later, they can demand reimbursement for the expenses from you.

A co-borrower takes the loan with you and bears the same responsibility for repayment. Co-borrowers are usually involved when the loan amount is large, and one person’s income is insufficient to repay it.

Loans with collateral or a guarantor are called secured. Their interest rates are usually lower than unsecured loans.

What Repayment Schedule to Choose?

Short-term loans for a few weeks or months are usually repaid in a single payment at the end of the contract. Longer credits and loans usually involve monthly payments. They are of two types:

Differentiated Payments: The principal amount you need is divided into equal parts to be paid monthly over the term. Interest on the remaining debt is added, so as the principal decreases, the interest decreases, and payments become smaller. The first month requires the highest payment, the last month the lowest.

Annuity Payments: The monthly payment stays the same throughout the loan term. At first, a significant part is interest, but by the end, most of the payment goes to the principal. With an annuity schedule, budgeting is easier. However, total overpayment is higher than with differentiated payments.

Credit cards have a special repayment schedule. For example, there may be a two- to three-month grace period: if you repay within it, no interest is charged. If not, you must pay a monthly minimum, e.g., 5% of the remaining principal plus accrued interest.

So, Which Loan to Choose?

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

Study different options and choose the best offer for you. Don’t forget to find out the full cost of the loan, including interest, payments, and additional service fees.

Try to ensure that all loan payments do not exceed 30% of your monthly income. Otherwise, you risk being unable to handle the credit load and ending up in debt or losing your collateral.

Read the loan documents carefully before signing.

Before contacting a financial organization, make sure it operates legally.