A loan is a small to large amount of money that you can borrow from a financial institution. Once you've borrowed the money, you can choose to pay the money back at once or over a period of time. With loans, you will usually need to pay the money that you borrowed back with interest. The loan amount and interest rate typically depends on your credit, debt, and annual salary. It is important to know how does one loan differ from another.
Before borrowing money from any institution, you should know that there are many different types of loans. It is important that you know your loan options before committing to a loan. Knowing your options will help you feel more confident when choosing a loan for yourself.
Secured Loans
Secured loans are loans that require assets for collateral. If you do not pay the loan back, your possessions will be taken to cover the loan cost. Interest rates are typically lower with secured loans than unsecured loans. Secured loans are often used for lower credit scores and larger loan amounts.
Unsecured Loans
Unsecured loans do not require any assets as collateral insurance. Typically, unsecured loans have higher interest rates, partly due to the absence of collateral. Some unsecured loans, particularly those through a bank, will require an almost immaculate credit score. Other unsecured loans, such as an easy personal loan through an online lender, can be gotten without good credit so long as the borrower is over 18, shows proof of income, and has an active checking account.
Open-ended Loans
Open-ended loans are loans that you can borrow from over and over again. Typically, these loans come from credit cards. Even though you can borrow from these loans over and over again, you will have a credit limit. The predetermined credit limit will allow you to know the maximum amount of money you can borrow. Each time you make a purchase, the amount of credit you have will decrease. As you continue to make payments, your available credit will increase.
Closed-ended Loans
A closed-ended loan are one-time loans. You will not be able to borrow from the loan again, even once it is repaid. As you continue to make payments to the loan, the amount you owe will decrease. Once you are done paying for the loan, you will have to reapply for another loan, if needed. Mortgage loans, student loans, and auto loans are common types of closed-ended loans.
Conventional Loans
Conventional loans are loans that are not insured or funded by the government. Conventional loans are most often used as mortgage loans and are typically fixed in terms of its terms and rates. Conventional loans typically also have less hefty down payments requirements.
Loans to Avoid
Try avoiding payday loans at all costs. Payday loans are short-term loans that are paid back to the company using your next paycheck. Payday loans are known to the public as predatory loans. Payday loan institutions are typically placed in impoverished communities. In addition, these loans typically have extraordinarily high interest rates. These interest rates can make the loan become difficult to repay. Even if you are in a financial bind, please seek other alternatives.
The Bottom Line
It doesn't matter if you're looking for a student, mortgage, or auto loan. Before committing to any loan, please be sure to choose the best option for you. In addition, please be sure to research the company and interest rates before choosing the loan. There are various types of loans, remember to pick the right one for your personal needs.
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