Types of Loans

There are many types of Loans and figuring out which one suits your needs can sometimes be a challenge. Mortgage loans, car loans, student loans, secured loans, with guarantors and without, open and closed - the list can be quite large.

Do not worry, now we will try to help you begin to navigate the complex world of loans. We have divided the types of loans for you into several groups so that you can understand it faster.

Open Loans

You are approving a loan for a certain amount, known as your credit limit. You can use this loan as needed. Once you pay the spent sum, you can re-use the credit line. The most common example is a credit card. It allows you to borrow as much money as you need within the credit limit. Quit the loan in a way that is convenient for you without a structured payment. After closing at any time, you can reopen the loan.

Most likely, such a loan variable interest rate, which can rise at any time. If you pay only the minimum payment, you can get trapped and for a long time pay interest on the loan.

Closed types of loans

These include auto loans, mortgages, student loans and others. You, as a borrower, have a structured payout schedule that determines the amount and amount of each payment. Once the debt is fully repaid, the loan is closed, the contract ceases to operate. If you want to borrow again, you will have to go through the entire procedure from the very beginning. A personal loan, just like that, can come up with this definition. You take a certain amount for a certain period. The rate for such loans can be fixed or floating.

If you know exactly what amount you need, and you want to be able to fully close the contract - closed loans will be an ideal option for you. Pay attention to the fact that there are often commissions for the use of such loans.

Fixed interest loan

This loan has a specific rate for the entire duration of the contract. For example, if you agreed to 5% for 60 months, the rate will remain unchanged for all 5 years of the loan.

In this case, you have a predictable rate for the duration of your loan. You know exactly how much you will pay each month. There is also a small minus of such an agreement, you cannot take advantage of the reduced rate on the loan.

Loan with variable rate

These loans have interest rates that can change in the light of changes in the financial market. For example, you can sign a contract for 60 months, which indicates a loan rate of 5% for the first 24 months, but then the rate can vary from 3% to 12% for the remaining crediting period.

Plus, and at the same time a minus in such a loan is dependence on the market rate. Which can, how to descend during the operation of your contract, and then your rate will also decrease, or may, on the contrary, rise.

Loan with collateral

You can access this loan by providing guarantees to your creditor in the form of a mortgage, for example, a car or real estate. In case you are not able to pay, the bank can take ownership and use the collateral to get the borrowed amount.

Often borrowers can get a lower interest rate because there are certain guarantees that the lender will get his money back if the borrower stops paying the loan. A loan with collateral has, as well as cons - first, a lengthy process due to the valuation of your property. Secondly, you cannot spend money the way you want, only for those purposes that are specified in the contract. Thirdly, in case you fail to meet your debt obligations, the pledge will go to the use of the lender.

Posted on June 08, 2018 at 05:53 PM