Understanding Common Types Of Loans
There are various reasons why consumers take on loans. Some do to purchase a brand new car; some do for home purchases and general living expenses. For those who have small businesses, loans are useful for working capital, buying real estate, equipment, or inventory.
There is a wide range of loan types available for every need. So it would be best to research the best type of loan that will work for you. Knowing your loan options can help you make better decisions as to which loan to take.
To understand the following loan types, you must first know that loans can either be secured or unsecured, open-ended or close-ended.
Here’s a quick guide:
- Secured loans
Are those that rely on an asset as collateral. So, in the event that you are not able to repay your debt, the lender can take possession of the asset.
- Unsecured loans
Do not require collateral and solely rely on your credit score and income in determining whether you are qualified for the loan. These loans may be more difficult to get and may have higher interest rates.
- Open-ended loans
Are loans that you can borrow repeatedly. Credit cards are the most common types of open-ended loans. You have a credit limit and you can use all or part of your credit. Each time you make a purchase it decreases; and increases again when you make payments.
- Close-ended loans
On the other hand, close-ended loans are loans that cannot be borrowed again once they have been repaid. Examples are student loans, auto loans, and mortgage loans.
Types of Loans
According to a survey taken by Finder.com, vehicle-related expenses account for most loans taken by Americans. Auto loans can be used to purchase used and brand new cars alike, with terms ranging from 24 months to 60 months; some up to 84 months. They can be financed through a bank, credit union, home equity loan, or car dealership. Car dealers might have the highest terms, while banks and credit unions have the lowest. A car loan is a secured loan, which means that the lender can seize the vehicle if you fail to make payments.
Most student borrowers take out federal student loans as they have fixed interest rates and are set to be repaid a few months after the student graduates. A federal student loan is either subsidized or unsubsidized. The subsidized version is meant for students with the greatest financial need. As the government pays for the interest while the student is in school. The unsubsidized version is meant for the average student borrower. Due to caps on federal loans, students also take out loans with private companies.
A mortgage is a close-ended, secured loan designed to make home-buying accessible to the average person by spreading out the cost over many years. The most common home loan is a 30-year fixed-rate mortgage, meaning the loan is repaid in fixed monthly instalments called amortization over the course of 30 years. Mortgages have among the lowest interest rates of all loan types.
Personal loans are the most versatile types of loans as they don’t have a designated purpose. They are a viable option for those who wish to pay off their credit card debts, fund vacations, or pay for daily expenses. Depending on the lender, a personal loan can be secured or unsecured. The terms of personal loans also vary widely, although the length is usually under 10 years with the usual amount cap of $100,000.
Avoid taking out unnecessary loans Read How To Stay Within Budget