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On the Dotted Line: 3 Loan Types and How They Affect You in Times of Need

A loan is defined as a lump sum of money that you borrow with the intention of paying back. Loans are typically a fixed amount. However, the exact amount you receive, and the interest rates you get will depend on your income, debt, and credit history.

Open-Ended and Closed-Ended Loans

Open-ended loans are loans that you can borrow repeatedly. Credit cards are the most common type of this loan. These loans usually have a credit limit which is the maximum amount that you can borrow at one time.

Closed-ended loans are one-time loans that cannot be borrowed again once they’ve been repaid. You also won’t have any available credit to use on closed-ended loans. If you need to borrow more money once the loan is repaired, you must apply for another loan and go through the approval process again. Common types of closed-ended loans include mortgage loans, auto loans, and student loans.

Secured and Unsecured Loans

Secured loans rely on an asset as collateral. In the event of a loan default, the lender can take the asset and use it to cover the loan. Additionally, interest rates are usually lower than those of unsecured loans. The asset may need to be appraised to determine its value. The lender may also only allow you to borrow the amount the asset is worth. An example of a secured loan is a title loan.

Unsecured loans, also sometimes called signature loans, don’t require an asset for collateral. These may be harder to get approved for and have higher interest rates. Unsecured loans rely solely on your credit history and your income for you to qualify for the loan. If you default on an unsecured loan, the lender must use collection options such as debt collectors and lawsuit to recover the loan. If you’re interested in a signature loan, apply at

Conventional Loans

The term “conventional loans” is often used about a mortgage loan. These loans are not insured by government agencies such as the Federal Housing Administration, Rural Housing Administration, and the Veterans Administration. Conventional loans may also be conforming, meaning they follow the guidelines set by Fannie Mae and Freddie Mac. Non-conforming loans don’t meet Fannie and Freddie qualifications.

When applying for a conventional loan, your financial history will be looked at. Conventional loans qualify applicants by using fractions and percentages that weigh their income and ability to repay the loan on time.

Home-buyers usually choose conventional loans because they offer the best rates and loan terms, usually resulting in a lower monthly payment. The standard down payment for a conventional loan is anywhere between 3 and 25 percent of the home’s value. Additionally, it’s important to have a good credit score and a steady monthly income.

When thinking about getting a loan, it’s important to know what your options are so you can pick the loan that is best for you. You want a loan that fits your personal needs and income. Learning about the loan types available to you is the first step toward finding the best fit for your needs.

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