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Which Loan Types Fit Your Situation?

bank loans

One of the most essential parts of a healthy economy is a strong lending sector. Loans enable depositors to earn interest and permit borrowers to finance everything from major consumer purchases to business expansion. This constant movement of money creates wealth and opportunity in every area of the economy.

Because loans are used for so many things, there are many different kinds of them. Consequently, the only way to be financially savvy about borrowing is to learn about what loans can be used for and how they are handled.

We can't cover every possible type of loan, but we can review some of the most common ones.

Mortgage Loans

Most people are familiar with mortgages. They are loans used to purchase real estate or buildings. Because these purchases are so large, the loans are structured for repayment over a long period of time, anywhere from ten to as many as 40 years.

Because these loans are secured by the property they are used to purchase, interest rates are very competitive for borrowers with good credit. There is considerable work involved in researching the deed on a piece of property prior to selling it, so mortgage applications take some time to process.

Auto Loans

Another common type of loan that secures itself is an auto loan. While their terms are far shorter than those of mortgages--usually three to six years--the interest rates are similarly low because the bank can simply repossess the vehicle if the borrower does not stay current on payments.

These loans are issued in a variety of ways. Car buyers can get the loan pre-approved through their own bank or credit union prior to shopping for the car, or they may finance it through a bank used by the dealership or even through the vehicle manufacturer itself.

Personal Loans

Lenders recognize that consumers sometimes need a smaller sum of money in a very short time. For that reason, they issue installment loans to people who might need to repair a home or vehicle, to pay an overdue medical bill or any of countless other options.

These loans are built to be flexible. Borrowers need only a social security number, a checking account, and an established source of income. This simplicity allows borrowers to build their credit by repaying a small loan in a satisfactory fashion, enabling them to get approved for larger loans they may need later.

Capital Loans

Any resource owned or managed by a business is referred to as capital. Even its employees are called human capital in order to include them among the other valuable assets of the company.

From time to time, companies need to borrow money to finance these items of capital. It could be that a surge of new orders has come in, necessitating new personnel who will need to be paid before the orders are paid. It could be a machinery upgrade. Whatever the purpose, the company will likely use the money quickly and repay it quickly.

Production Credit

A similar type of loan is widely used in agriculture. At the beginning of a crop season, farmers typically do not have the cash to purchase the necessary seed, fertilizer, and other inputs to get their crops in the ground. Consequently, they borrow the money from a bank, then repay it after the crop has been harvested and sold. This is called a production credit loan or an operating loan.

The value of this type of loan is that it prevents farmers from being in a financial pinch each summer as they wait on their crops to grow. They can keep their money for other purposes and let the crop finance itself.

There are many different types of loans available to many different kinds of people and businesses. Each one is carefully designed to work in the specific circumstances for which it has been created. You as the borrower need to understand what type of loan makes sense for your particular need. That's where an educated consumer comes in, and that's why it's important to be one.

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