Types of Loan

If you are thinking of borrowing some money, you should research about all types of loan options available to you. This will help you to decide which type of loan is most suitable for you. In this article we will learn about the various types of loan.

Secured and Unsecured Loans
Secured loans:          These are the type loans that secure a loan with the help of collateral. The collateral can be any valuable which the lender has the right to take into possession and sell it in case the user is unable to repay the loan. For this reason the interest’s rates for secured loans can be lower than that for unsecured loans. The asset used as collateral is valued before a loan is granted.

Unsecured loans:     These types of loans rely solely on the credit history and earnings of a person and in this kind of loans there is no asset for collateral. These loans have a higher interest rate. It carries a greater risk for the lender as well as the user. If a person defaults on this kind of loan and the lender has no option to recover it then, the lender can opt for debt collectors or sue user in the court of law.

Open-Ended and Closed-Ended Loans

Open-ended loans: These are the type of loans that can be borrowed over and over. Of all types of open-ended loans available credit cards is the most common and popular type of open-ended loans. When using credit cards for purchasing any product or services, the credit limited on your credit card decreases.  When you repay that the credit limit increases again and you can use that credit limit again.

Closed-ended loans: They are the loans that cannot be borrowed after they have been repaid. Close ended loans doesn’t provide its users with credit limits. When you repay the closed-ended loans, the balance of the loan goes down. If you need more money, then you would have to apply for a new loan. The most examples of closed-ended loans are mortgage loans, auto loans, student loans, etc.

Conventional Loans

Those loans which are not insured by a government agency like the Federal Housing Administration (FHA), Rural Housing Service (RHS), or the Veterans Administration (VA) are known as Conventional Loans. They might be following the guidelines set by Fannie Mae and Freddie Mac.

Loans You Should Avoid

Certain types of loans may seem very lucrative but opting for them can put you in bigger troubles. Payday loan is one such loan. It a short term loan which uses your next pay cheque as a guarantee for the loan. They have a very high annual percentage rates and can be difficult to repay.

Have you heard of Advance-fee loans? Do not opt for it. They are actually scams that are designed to rip you of your money. Such shady lenders actually ask you to send them money as advance fee in order to approve your loan. Once you send them the money, they disappear without a trace.

These were the various types of loan that a person can avail of in times of financial crunch.