UNDERSTANDING DIFFERENT TYPES OF LOANS AND HOW THEY WORK.
WHAT IS A LOAN.
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient incurs a debt and is usually liable to pay interest on that debt until it is repaid as well as to repay the principal amount borrowed.
The term loan refers to a type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value or principal amount. In many cases, the lender also adds interest and/or finance charges to the principal value which the borrower must repay in addition to the principal balance. Loans may be for a specific, one-time amount, or they may be available as an open-ended line of credit up to a specified limit. Loans come in many different forms including secured, unsecured, commercial, and personal loans.
A loan is a form of debt incurred by an individual or other entity. The lender—usually a corporation, financial institution, or government—advances a sum of money to the borrower. In return, the borrower agrees to a certain set of terms including any finance charges, interest, repayment date, and other conditions. In some cases, the lender may require collateral to secure the loan and ensure repayment. Loans may also take the form of bonds and certificates of deposit (CDs). It is also possible to take a loan from a 401(k) account.
* A loan is when money is given to another party in exchange for repayment of the loan principal amount plus interest.
* Loan terms are agreed to by each party before any money is advanced.
* A loan may be secured by collateral such as a mortgage or it may be unsecured such as a credit card.
* Revolving loans or lines can be spent, repaid, and spent again, while term loans are fixed-rate, fixed-payment loans.
TYPES OF LOANS.
Loans can be classified further into secured and unsecured, open-end and closed-end, and conventional types.
WHAT IS A SECURED LOAN?
A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the
WHAT IS AN UNSECURED LOAN?
An unsecured loan is a loan that doesn’t require any type of collateral. Instead of relying on a borrower’s assets as security, lenders approve unsecured loans based on a borrower’s creditworthiness. Examples of unsecured loans include personal loans, student loans, and credit cards.
1. SECURED VS UNSECURED LOANS.
Key Differences; The biggest difference is that in the case of a secured loan, one needs to keep collateral against the loan, and in the case of an unsecured loan. It is supported by a borrower’s strong creditworthiness and economic stability.
Secured loans require that you offer up something you own of value as collateral in case you can’t pay back your loan, whereas unsecured loans allow you borrow the money outright (after the lender considers your financials).
2. OPEN-END AND CLOSED-END LOANS.
Closed-end credit must be repaid in full by a predetermined date, also known as the loan maturity date. Open-end credit must be repaid over time and generally gives consumers the option of making minimum monthly payments or greater each billing cycle.
3. CONVENTIONAL LOANS.
Conventional” just means that the loan is not part of a specific government program. Conventional loans typically cost less than FHA loans but can be more difficult to get.
TYPES OF LOANS TO HELP YOU MAKE NECESSARY PURCHASES.
Here are 15 types of loans that can help you make necessary purchases in your life:
1. Personal Loans.
Personal loans are the broadest type of loan category and typically have repayment terms between 24 and 84 months. They can be used for just about anything except for a college education or illegal activities. People commonly use personal loans for things like:
(4) Medical treatment
(5) Home renovations
(6) Debt consolidation
(7) Relocating to a new city
(8) Computers or other pricey electronics.
Personal loans generally come in two forms: secured and unsecured. Secured loans are backed by collateral—such as a savings account or a vehicle—that a lender can take back if you don’t repay your full loan amount.
Unsecured loans, on the other hand, require no collateral and are backed by your signature alone, hence their alternate name: signature loans. Unsecured loans tend to be more expensive and require better credit because the lender takes on more risk.
Applying for a personal loan is easy, and typically can be done online through a bank, credit union or online lender. Borrowers with excellent credit can qualify for the best personal loans, which come with low interest rates and a range of repayment options.
2. Auto Loans.
Auto loans are a type of secured loan that you can use to buy a vehicle with repayment terms between three to seven years. In this case, the collateral for the loan is the vehicle itself. If you don’t pay, the lender will repossess the car.
You can typically get auto loans from credit unions, banks, online lenders and even car dealerships. Some car dealerships have a financing department where they help you find the best loan from partner lenders. Others operate as “buy-here-pay-here” lenders, where the dealership itself gives you the loan. These tend to be much more expensive, though.
3. Student Loans.
Student loans are meant to pay for tuition, fees and living expenses at accredited schools. This means that you generally can’t use student loans to pay for specific types of education, such as coding bootcamps or informal classes.
There are two types of student loans: federal and private. You get federal student loans by filling out the Free Application for Federal Student Aid (FAFSA) and working with your school’s financial aid department. Federal student loans generally come with more protections and benefits but charge slightly higher interest rates. Private student loans come with much fewer protections and benefits, but if your credit is good, you could qualify for better rates.
4. Mortgage Loans.
Mortgages help you finance the purchase of a home, and there are many types of mortgages available. Banks and credit unions are common mortgage lenders; however, they may sell their loans to a federally-sponsored group like Fannie Mae or Freddie Mac if it’s a qualified mortgage.
There are also government-backed loan programs available for certain groups of people, including:
(1) USDA loans for rural, low-income homebuyers.
(2) FHA loans for people with low- to moderate-income levels.
(3) VA loans for active-duty servicemembers and veterans.
5. Home Equity Loans.
If you have equity in your home, you might be able to use a home equity loan, also known as a second mortgage. The equity you have in your home—the portion of your home that you own, and not the bank—secures the loan. You can typically borrow up to 85% of your home’s equity, which is paid out as a lump sum amount and repaid over five to 30 years.
To find out your home’s equity, simply subtract your mortgage balance from your home’s assessed value. For example, if you owe $150,000 on your mortgage and your home is worth $250,000, then your equity is $100,000. Considering the 85% loan limit rule, and depending on your lender, you could potentially borrow up to $85,000 with $100,000 in equity.
6. Credit-builder Loans.
Credit-builder loans are small, short-term loans that are taken out to help you build credit. Since they’re marketed toward people with zero or limited credit, you don’t need good credit to qualify, unlike regular loans. You can typically find credit-builder loans at credit unions, community banks, Community Development Financial Institutions (CDFIs), lending circles or online lenders.
Instead of receiving the loan funds up front as you would on a traditional loan, you make fixed monthly payments and receive the money back at the end of the loan term. Credit-builder loans typically range between $300 to $3,000 and charge annual percentage rates (APRs) between 6% and 16%.
Credit-builder loans can be a very affordable and safe way to start building credit, especially for young people. If you put your payments on auto-pay, for example, you’ll never have to worry about making your payments and you can build credit entirely on auto-pilot.
7. Debt Consolidation Loans.
Debt consolidation lets you streamline your payments by applying for a new loan to pay off your other debts, therefore leaving you with only one monthly loan payment. If you have high-interest debts like credit cards or a high-interest personal loan, a debt consolidation loan can help you in two ways. First, you could qualify for a lower monthly payment. Second, you could qualify for lower rates, which can help you save money over the long term.
In order to get a debt consolidation loan that improves your payments, though, you’ll need to first shop around for a lower rate than your current loan or credit card. You’re also more likely to qualify if your credit has improved since you took out your current loan or card. Once you qualify, your lender may automatically pay the debts for you, or you will need to do it yourself.
8. Title Loans.
Title loans are another type of secured loan where you pledge the title for a vehicle you own—such as a car, truck or RV—as collateral. Your loan limit typically is anywhere between 25% to 50% of your car’s value, evaluated by the lender. Lenders that offer title loans also charge a monthly fee of 25% of the loan amount, which translates to an annual percentage rate (APR) of at least 300%, making these a costly financing option.
THIS LOANS ARE DIFFERENT FROM TRADITIONAL AUTO OR RV LOANS FOR A FEW REASONS:
They charge very high rates.
You give the title to the lender as collateral for the loan.
They’re short-term loans, typically up to 30 days.
Thus, title loans generally fall in the same category as payday loans: they’re very expensive, short-term, small-dollar loans that are often considered predatory.
9. Pawnshop Loans.
Pawnshop loans are another type of loan we usually don’t recommend because they’re very expensive, have small loan limits and require quick repayment. To get a pawnshop loan, you’ll bring something of value to the pawnbroker, such as a power tool, a piece of jewelry or a musical instrument.
The pawnbroker will assess the item, and if they offer you a loan, it’ll typically be worth 25% to 60% of the item’s resale value. You’ll receive a pawn ticket, which you’ll need when you return to repay the loan, typically within 30 days. If you don’t return, or if you lose your ticket, the pawnbroker gets to keep your item to resell and recoup their money.
10. Boat Loans.
Boat loans are specifically designed to finance the purchase of a boat and are available through banks, credit unions and online lenders. The loans can either be unsecured or secured, with secured loans using your boat as collateral. As with any vehicle-related loan, it’s crucial to keep depreciation in mind.
Boats and other vehicles lose value over time, especially if you buy a new boat. If you choose a long-term loan, don’t make a very large down payment and/or sell your boat soon after you buy it, it’s possible to owe more on the loan than you can sell it for. This means you’ll need to keep paying off the loan even after you sell the boat, and that’s not an enviable position to be in.
11. Recreational Vehicle (RV) Loans.
RV loans can either be unsecured or secured loans. Smaller RV loans are typically unsecured and work similarly to a personal loan while expensive, luxury RVs are secured—with the RV serving as collateral—and work more like an auto loan.
Depending on the lender, you can find RV loans for around $25,000 that you repay over a few years, but you also can find loans up to $300,000 that you repay over 20 years.
RVs are fun and they can help you and your family enjoy quality time together. But it’s important to keep depreciation in mind, especially if you’re buying a new RV and you think you’ll be selling it at some point down the line.
12. Family Loans,
Family loans are informal loans that you get from family members (and sometimes friends). You may choose to turn to family if you can’t qualify for a traditional loan from a bank or lender, for example.
Family loans can be useful because you don’t need any credit to get one. If your family member trusts you and they have the financial means to do so, they can choose to give you the loan.
But that doesn’t mean you should take advantage of your family member’s generosity. It’s still a good idea to draft up and sign a loan agreement, including interest payments, due dates, late fees or other consequences for non-payment. You can find draft agreements and payment calculators online to help you do this.
13. Land Loans.
There are a lot of reasons people buy land. Maybe they want to build a house on it, harvest its natural resources or lease it out to other people and businesses. But land can be expensive, and that’s where a land loan can come in handy.
Land loans generally come in two forms: improved and unimproved land loans. Improved land loans are for plots that are ready to build on. For example, they might have a well and septic tank already installed, power lines or a driveway. Unimproved land loans, on the other hand, are for a plot of vacant land, which may or may not be easy to access.
If you choose to take out a land loan, you can expect to have higher interest rates and more strict down payments and credit requirements than other property loans because they’re a more risky transaction for a lender.
14. Payday Loans.
Payday loans are a type of short-term loan, usually lasting just until your next paycheck. These loans aren’t credit-based, and so you don’t need good credit to qualify. However, these loans are often predatory in nature, for a couple of reasons.
First, they charge very high finance fees, which can work out to around 400% APR in some cases (the finance fee isn’t the same thing as an APR). Second, they allow you to roll over your loan if you can’t pay it off by your next paycheck. It sounds helpful at first—until you realize even more fees are tacked on, which trap a lot of people in debt obligations that can be higher than what they originally borrowed.
15. Small Business Loans.
There are several types of small business loans, including Small Business Administration (SBA) loans, working capital loans, term loans and equipment loans. These loans help small businesses, typically companies with up to 300 employees, fund their operations. Local businesses—like landscapers, hair salons, restaurants or family-owned grocers—and sole proprietors—such as freelancers who still have a traditional day job—also can apply.
Small business loans typically have more qualification requirements than personal loans, especially if you’re applying for an SBA loan. However, the rewards are well worth it because these loans can give your business the financing it needs to grow. Alternative business financing methods, like invoice factoring or merchant cash advances, may be more costly, leaving small business loans as the best option for business financing.
ADVANTAGES OF TAKING OUT A LOAN.
* Loans can help you out of a tight spot.
* There are plenty of different loan durations.
* There are different kinds of loan.
* You can improve bad credit with loans.
* You can consolidate debt with loans.
DISADVANTAGES OF TAKING OUT A LOAN.
* You’ll have to pay them back.
* Bad credit means less likelihood of a loan.
* You’ll pay a lot of interest.
* Loans often have fees.
* You might not get what you want.
WHAT CAN YOU USE A LOAN FOR IN GENERAL.
Loans are advanced for a number of reasons including major purchases, investing, renovations, debt consolidation, and business ventures. Loans also help existing companies expand their operations.
HOW TO GET A LOAN.
You can get a loan through a bank, credit union, credit card issuer, or online financial lender. You can normally apply online or in person and will have to provide some basic personal and financial information. Your lender will consider your employment status, income, outstanding debts, and overall credit score to assess whether you are eligible for a loan and determine the interest rate that you will pay.
1. Run the numbers. …
2. Check your credit score. …
3. Consider your options. …
4. Choose your loan type. …
5. Shop around for the best loan rates. …
6. Pick a lender and apply. …
7. Provide necessary documentation. …
8. Accept the loan and start making payments.
The Bottom Line;
Loans are one of the basic building blocks of the financial economy. By giving out money with interest, lenders are able to provide funding for economic activity while being compensated for their risk. From small personal loans to billion-dollar corporate debts, lending money is an essential function of the modern economy.
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