What Are the Different Types of Loan?

A loan is a sum of money that you can borrow from an institution with the intention of paying it back, either over time or all in one go. Usually, you’ll need to pay back the amount that you have borrowed with interest. Loans are typically offered in a fixed amount, and the exact amount that you borrow will depend on a number of different factors, from how much you need, to how much your credit history allows you to reasonably ask for.
There are many different types of loan available, and knowing your loan options will help you to make more informed decisions about the type of cash you need to access when meeting your goals.

Closed-Ended and Open-Ended Loans

Let’s start by looking at closed-ended and open-ended loans. With open-ended loans, you can borrow money over and over again without incurring problems, so long as you continue to pay off the amount you owe. Lines of credit and credit cards are some of the most common types of open-ended loan. Both of these come with a credit limit which represents the maximum amount any person can borrow at one given time. Every time you purchase something, your credit will decrease, and as you make payments into your credit card, your available credit will increase.

Closed-ended loans, on the other hand are loans that can’t be accessed again once they have been repaid. When you make payments on a closed-ended loan, the balance of your loan will go down. If you want to borrow more money, you’ll need to apply for another loan and pay it off all over again. An example of a closed ended loan might be a car or student loan.

Unsecured and Secured Loans

Now that you understand the concept of unsecured and secured loans a little better, you should be able to further understand the nature of secured and unsecured loans. Secured loans are the loans that rely exclusively on an asset as collateral for the overall loan. In the event of a default on the loan, the lender will be able to take possession of the asset and use that as value to cover the loan. Secured loan interest rates can be lower than the interest rates for unsecured loan because the lender will have some form of protection.

Of course, in order to get a secured loan properly, you may find that the asset that the loan is being taken out against needs to be assessed by an appraiser so you can determine its full value before accessing your loan. A title loan may be one of the most common examples of a secured loan.

On the other hand, unsecured loans don’t require any kind of asset in place for collateral. Instead, these loans may be more difficult to get, and generally come with higher interest rates because the lender doesn’t have any kind of security. Unsecured loans rely completely on the reliability of your credit history and your current income, and these numbers are used to determine whether you are trustworthy enough to lend to. If you default on your unsecured loan, then your lender will have to exhaust a range of collection options, and may also give your details to debt collectors to try and recover the money they are owed.

What’s a Conventional Loan?

When it comes to loans and lending, one of the most common areas to address is that of the mortgage. The term conventional loan is generally used for mortgages, and this term also refers to any loans that are not insured by a government agency such as the FHA or federal housing administration, or the RHS – otherwise known as the rural housing services. Conventional loans can sometimes be conforming, which basically means that they follow the guidelines that have been set forth for certain types of loans.

Which Loans Should you Avoid?

Though only you can decide what kind of loan you need for your specific goals or ambitions, there are certain types of loan that should generally be avoided at all costs because they can sometimes take advantage of customers and leave you in a very difficult financial position. For instance, short-term loans that allow you to access a significant amount of money before payday can sometimes be dangerous because they come with high annual percentage rates that are extremely difficult to pay off.

If you are in a very difficult financial position, you should always consider the different options that are available to you in full before you take out a payday loan. It’s also important to double check any loan offers that seem too good to be true or may be with lenders that you aren’t familiar with. Sometimes financial options can be given that look similar to loans but are actually extremely dangerous cons.

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