WHAT ARE LOANS?
To get to the very basic of loaning, let us first describe what it is: Loans are borrowing money from a lender and ideally using that money for a specific purpose. It may be to fund an emergency, pay the bills, buy a home or car and more.
But loans aren’t as simple that. There are actually different types of loans you can borrow, different types of credit and different loan categories. Don’t worry because we’ll be breaking everything down for you.
There are two broad categories of loans which loans can be placed under: secured loans and unsecured loans.
Not all loans are equal in terms of how easy it is to get them. It’s a good idea that you familiarize yourself with what’s available, especially with regards to loans with low-interest rates.
TYPES OF CREDIT
There are two types of credit which every loans type fall under: open-end credit and closed-end credit. Open-end credit requires small monthly payments.
Open End Credit: Examples of this type of credit would be credit card accounts, home equity credit lines. You can use this ‘credit’ while still making payments against the total balance.
Closed-end Credit: Closed-end credit are loans given with a fixed amount; these loans are always used for something specific and there is a time period attached to the loan for repayment. Examples of this type of loan would be a mortgage loan, car loan, payday loan, etc.
OVERVIEW OF DIFFERENT LOAN TYPES
A breakdown of the various loan borrowing options are the following:
Personal Loans: secured or unsecured loans given to an individual. Can be used for anything.
Payday Loans: short term loans with very high interest. These should be the loan of last resort if all other loan options have been exhausted.
Salary Advance Loans: get an advance on your paycheck from a credit union. Easy to get and less interest than payday loans. A good option if you have a steady income. A Payday Loan Alternative.
Student Loans: private loans used to pay for school. Usually some sort deferred interest and payment requirements until school has been completed.
Car Title Loans: a loan taken out based on the value of your car.
Car Loans: These are basically loans that you get to buy a car. You can approach the bank directly and seek to get some kind of personal or auto loan to buy a vehicle.
Peer to Peer Loans: a new sort of loan where you borrow small loans from a community of lenders.
Home Equity Loans: loans taken out on the equity of your home.
BEFORE YOU GET A LOAN
Now that you’re familiar with the different types of loan, you probably already have a specific loan in mind that matches your need.
Here are a few quick reminders before you take out that loan:
If You’re Qualified For The Loan
you qualify or not for a personal loan will depend on your credit
score. Almost all loans require some kind of credit check. Bad
credit will get you high-interest rates on the loan or even flat
denial of the loan. So it’s a good idea to look at your credit
score and see where you stand. If you have bad credit, we recommend
you repair your credit and if you have debt issues, seek debt
Make Sure You Can Afford to Repay the Loan
you can’t afford a loan, you can’t afford a loan. So don’t get
any sort of loan that you will have problems making payments on.
Absolutely look at how much interest you will pay, any associated
fees for taking out a loan, the time allowed for repayment, etc.
Pay Close Attention to the Loan Terms – Interest, Repayment time, Penalties
Remember that loans do require you to repay them so you better read
the fine print to see what you are getting yourself into. Paying
close attention to the interest rate a lender is charging is
extremely important when shopping for a loan.
Early repayment penalties, or redemption fees, are generally charged
when borrowers want to repay their loans before the agreed term to
compensate the loan provider for the resulting loss of interest.
A typical penalty could be equivalent to one or two months’ interest, although the penalties charged will often fall towards the end of the loan agreement.
Those keen to avoid redemption fees should look for flexible loans that can be paid off early penalty-free.