It is the twentieth century and no longer do people keep a sack of currency notes in the corner of the bedroom for emergencies. When it comes to making preparations for a buffer of emergency funds, there are actually countless avenues that are available to the general public. But it almost always will be 2 choices that come to mind of the seeker.
Term loans are one-time cash disbursements given for a particular duration of time. When a borrower takes one up, the total interest charges will be calculated upfront. It will then be added onto the principle amount. The total tally will then be divided by the tenor (in months). This final result will be the installment that a borrower have to repay through the tenor of the loan.
Whereas for an overdraft, the user does not incur any interest charges as long as the facility is not drawn upon. However, the issuer often charges an annual fee. A credit line will always be tagged to an overdraft account. Meaning that if the line is at $5,000, the maximum that the user can draw from the card is $5,000. In some cases which are gaining in popularity, borrowings that exceed the credit limit will incur additional charges.
For dealing with a situation where you need more money on a flexible term, you should go for the facility of a term loan. It would save you from a severe financial condition and give you the necessary help. In almost all cases, a straight out cash loan will incur a much smaller interest rate as compared to an overdraft.
Pros and cons
Repayments for term loans are fixed for a particular date of a month. Usually a loan account is created and the repayment amount is automatically debited from the account each month. But constant monitoring is required for overdrafts for usage and due dates.
The interest is also fixed for cash loans. Unless you agreed to it in the first place, a lender cannot adjust the rates in the midst of the tenor citing market forces as the reason. But to double-check the accuracy of an amortization breakdown, you should first find out whether the bank is using a reducing rate or a flat rate on your borrowings. A reducing rate merely means that the same interest is charged on the monthly decreasing outstanding balance. While a flat rate refers to a full charge on the original principle. Because repayments are worked out beforehand so that installment amounts can be determined for payment, a term loan cannot work in a way that take adjustable rates into account. The exemption is mortgages.
Taking this factor to task, it also means that a borrower has to decide on how much to borrow from the start as there is lenders will not entertain any request to reduce a loan. You will most likely be notified of pre-payment penalties instead. Whereas for those who are indecisive on how much funds are exactly needed, an overdraft offers more flexibility.
A feature of term loans that borrowers prefer is the less attention required to give it. Once the funds are disbursed, all a borrower has to do is make sure repayment is made before a specified date each month. And if you suddenly feel somewhat cash rich, you can always inform the lender of your intention to proceed with a redemption to feel a little more debt-free.
Unlike an overdraft account. A user has to constantly find out what is the amount due and what are the minimum payments to make monthly. And it is also a great challenge in itself to work out how the interest charges were derived. Because quoted rates are on an annual basis, the total fees will have to be calculated on a 365 day basis based on the number of days funds were borrowed. If that has already confused you, you are not alone. I have given up on working out the sums myself years ago.
When the availability of emergency funds is the objective of a borrower, the obvious choice will appear to be an overdraft facility. Since you do not borrow any money as long as you do not touch the account. It is like a money vault whereby you hold key to which can be called into action at any moment in time. It will become exactly like what you intended. Money available in emergencies.
The biggest benefit of a term loan is the view
But if you are to open your mind for just a minute, imagine that you can actually take out a full term loan and place it in a time or structured deposit. The funds will then be readily available when you really need it in short notice. At the same time, you can play a clever interest offset with the interest you earn. Although this can appear like you are inadequately gearing up by borrowing more than you really need, take into account that interest charges for overdraft accounts can cost 5 to 10 times more than a term loan. The answer does not look so obvious anymore right?
Secured lending
When you have a juicy asset that can come in handy, you should consider putting it up as collateral. This is because secured loans is not only more easily approved, but the interest can sometimes be up to 10 times lower than an unsecured facility.
Common assets that are pledge as collateral are real estate, stocks, bonds, savings, insurance, etc. When security is involved, a lender is taking on lesser risks of losses, and therefore more favorable terms can be offered. If asset based lending do come into play, lenders often apply a discount to the final loan quantum. This means that a ratio to the value of an asset will be used as the basis for lending. Meaning when a ratio of 7:10 or 70% is applied, an asset valued at $10,000 can be used to borrow up to $7,000.
For some reason, the favorite asset always seem to be real estate. Not only are they often highly valued, but the lending ratios tend to be higher as well even though stocks are more liquid.