A loan is a large amount of money that one borrows and thereafter pays back. This is a process that allows you to pay the amount back either immediately or over a longer period. Loans are thus a fixed amount that can reach increasingly high amounts.
The total amount of the loan that should be paid back at the end of the day changes depending on one’s income, credit history and your income to name but a few factors.
With many different types of loans, you can borrow, it’s important to know what options there are and, which are best suited for you.
Open-Ended and Closed-Ended Loans
Considered as loans that can be borrowed multiple times, both open-ended and closed-ended loans are some of the most popular loans people tend to make use of.
The most popular open-ended loans are credit cards and various lines of credit that both have a credit limit which only allows you to borrow a certain amount of money at one time. You can either make use of the entire credit limit or part of it when applying for this type of loan. With each purchase, your available limit will get less and less and as you make payments, your available credit in return will increase.
Close-ended loans are considered one-time loans and can thus only be borrowed once they’ve been paid. When making payments on these loans, the initial balance of it decreases. This doesn’t allow you to have any available credit. If ever you must borrow more money, you’ll have to apply for yet another loan when choosing this option. These types of loans most commonly include auto loans, student loans, and mortgage loans.
Secured and Unsecured Loans
Relying on both assets and collateral objects as a set value for a loan, a lender can take these as a cover for the loan.
A secured loans value will have to be confirmed before one can borrow it. In most cases, the lender only allows you to borrow a loan that equals to the value of the asset you provide them with.
Unsecured loans are the opposite of secured loans and do not require any asset to be used as collateral. An unsecured loan has higher interest rates and is generally harder to obtain as many can’t afford them while in debt. They also rely completely on your credit history, as well as your income. These are the two factors that allow you to qualify when applying for it.
Also referred to as a mortgage loan, conventional loans are those that are not insured by the government. In the U.S. those who oversee the general loan but not the conventional ones are the Federal Housing Administration, as well as Rural Housing Services and the Veterans Administration. These types of loans usually follow rules that are set by the Federal National Mortgage Association.
Some loans should be avoided
You might not think this to be true, but there are even some loans that should be avoided as they are run by individuals that take advantage of their consumers. These are usually payday loans which are short-term loans. These should be avoided at all cost, to avoid possible scams.