What is a purchase loan? As the name would suggest, this is a type of loan in which you apply for when you desperately need to purchase something but doesn’t have the cash at hand. One point to note when it comes to purchase loans is that the amount you borrow should be less than the value of the item you intend to purchase. Also note that the borrower always has to put down some form of ‘out-of-pocket down payment’ before the lending institution agrees to issue the purchase loan.
Car loans and credit
The commonest examples of purchase loans include loans to buy a car or home. Basically, a type of loan a borrower takes to finance an asset that you want to purchase but which you cannot afford with the little amount of money that you have at hand. There are also purchase loans taken for business or educational purposes depending on what you want to buy at that point in time. Note that the terms and conditions of purchase loans vary significantly from one lender to another and are also determined by your credit record or credit worthiness at the time of application.
What are purchase loans?
In most cases, purchase loans are taken as unsecured i.e. no collateral needed to be put in place while applying for the loan. As is therefore expected, as is with any other type of unsecured loan that has no collateral, the interest rates will be significantly higher and the terms and conditions will be stricter. In most cases with purchase loans, the item being bought acts as the security or collateral. So if you buy a house through a purchase loan, the house will be co-owned between you and the lender until the time you finish servicing the loan when full ownership will be transferred to you. The same goes for car purchase loans, the logbook will bear two names; yours and that of your lender until the time the loan is payable in full and all ownership is transferred to you.
One of the most notable disadvantages of purchase loans is that when the collateral is co-owned, should you default to pay back the loan it will mean you will not only lose the property but also the money that you would have placed as down-payment and all the monthly payments you will have made until the time of default. It is because of this that you need to plan accordingly and in advance before you set out to apply for a purchase loan. Depending on the amount of money you want to borrow, sit down and draw an income and expenditure budget to determine whether the loan will be serviceable or it will only be another financial hurdle on your finances.