Guide to All Kinds of Loan and Choosing the One That's Right for You

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Money is scarce, and you can never have enough of it. There are times when an opportunity can present itself, but it needs a lot of cash. You may raise some of the amount, but not all of it. Your next best option after that is to borrow the rest of the money. You could try asking family and friends for the remaining amount. However, that may not be enough. Since other people around also have financial commitment, they are unlikely to give you the entire remaining amount.

This is where formal loans come in. Most people hate asking for a loan from a financial institution because it can be annoying at times. This is because there are a lot of formalities before the institution agrees to give you the loan. In addition, repaying the loan requires total commitment until you clear the full amount plus interest.

However, you should keep in mind that there are different loans that are meant to serve distinct purposes. This means that you need to have a clear knowledge of the various loans that you qualify for and remember to check if they’re within your ability to repay them. Here is a further explanation of different loans that you can apply for.

1. Variable-rate Loans

For a variable-rate loan, you get access to a loan that has a varied-rate based on the movement of interest rates in the market. There are occasions where the market rate may increase for that particular month. If that’s the case, the interest rate that you will be charged will be higher than it was before. On the other hand, if the market interest rate drops, you get the benefit of paying interest at a lower rate. This kind of alternating rate is available with mortgage loans where you and the loan issuant have to agree on an adjustable-rate mortgage (ARM).

2. Fixed-rate Loans

A fixed-rate loan, on the other hand, is simply a loan that has the same interest rate for every month that you have to make the payments. Since the rate rarely changes, it’s much easier to know what you’ll need to pay at the end of every month. This type of loan is still available for a mortgage where you can apply for a fixed-rate mortgage (FRM).

3. Secured Loans

One of the most common loans accessed by a majority of the working class citizens is the secured loan. This is a type of loan that has collateral that’s provided to the creditor in order to reduce risk. In addition, the collateral for most secured loans will attract a lower interest rate compared to unsecured ones. However, if things go south, and you’re unable to repay the loan, the creditor is legally entitled to take hold of the property signed as collateral. A good example is when you acquire a car on loan and put down your home as collateral. When your payment is due, and you fail to make the payment, the bank is allowed to sell your house and use the profit to repay the debt. If there’s any amount that remains, it has to be given back to you as balance. The creditor can then liquidate the asset so as to pay back the due loan.

4. Unsecured Loans

On the other hand, unsecured loans are the opposite of secured ones. In this scenario, the creditor has no legal right to seize your property as collateral, and that’s why they tend to have a much higher interest rate. Some of these loans include medical bills, student loans, and credit card debt. If you happen to acquire this sort of loan and fail to pay up after a long period of time, you risk tarnishing your credit score. This means that you’re likely to be shown the door next time you think about borrowing money from a financial institution.

5. Open-ended

This is a type of loan that involves a revolving form of credit. This is the type of loan that grants you the permission to borrow up to a certain credit limit that’ll be decided in advance. Take for example, your creditor sets out a $6000 credit card limit to you. Typically, you’d pay about $1000 after a month meaning that your balance now remains to be $5000. If you manage to pay what’s remaining in full, you’ll have access to the $6000 credit limit. However, failure to do so reduces the limit, and there’s still interest generated for the balance.

6. Closed-ended loans

On the other hand, a close-ended loan is a kind of debt that’s issued and paid once. This loan requires that you agree with the lender when you’ll be able to pay back the borrowed amount. The loan limit has to be revised after you pay back the initial debt. An example is when you go out to acquire a fixed sum of money of let’s say $15000 so as to purchase a new car. The loan terms declare that the loan must be repaid within a period of 40 months. Once you pay up, the loan is deemed closed. If you may want to acquire another loan to purchase something else, you cannot get the same loan limit. You have to sit down with lender and agree on a new limit and repayment terms.

7. Personal Loans

These are the kind of loans that you take to cater for personal expenses. They generally have no specific purpose and are preferred by those that want to get some money due to credit card debt. Just like several other loans, personal loans will depend on your credit history. If you want to know more about the financial limitations of a personal loan, you can get more info here.

Conclusion

The above examples are the kinds of loans currently available in financial institutions. The loans have different repayment terms. Some require collateral while others don’t. Others allow you to take the same amount of credit upon full repayment of the first loan. Before you choose a loan, make sure that you can handle the terms. The best one for you depends on your financial situation and ability to repay back the amount.

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