As technology progresses the processes involved in doing a lot of things keep getting easier and easier. Taking a loan is also one of the things that have been made easier. A loan can be taken to finance a wide range of things, from starting up a small-scale business, getting your dream car, or even flying to an island for a vacation.
However, despite how easy taking loans have been made, it is pertinent to understand that it is a major commitment. And loans are of various types and each type has its peculiarities. Hence, in this article, we will discuss the various types of loans to help you make a choice on which would suit your needs best.
This type of loan is taken when a house is bought. It usually comes from the building community or a bank. After applying for the mortgage, you would be required to provide your income, credit score, and expenditure. The lender would then study all of these alongside the house’s value and your deposit for the property. It is after considering all these that the lender would now decide on the loan’s term.
2. Home Equity
Home equity is sometimes called the “second mortgage” because of how similar it is to a mortgage. However, with home equity, the house equity (the house’s current value) is put on the line as collateral.
You would need an excellent credit score and history to get a home equity loan. The interest rate and repayment period are often fixed.
3. Personal Loan
A personal loan can be taken for various reasons. While it is a lot easier to get a personal loan – because the amount may be small when placed in comparison to other types of loans – you must be certain of your ability to pay it back. There are two major types of personal loans; these are:
- Unsecured – An unsecured personal loan does not require you to present collateral. Because of this, the lender may use your credit scores or report to determine if you are eligible. If your credit score is bad or fair, you can still be eligible, however, you may have to scout to ensure you get a lender whose monthly payment and interest rate fits your budget.
- Secured – A personal loan that is secured will require collateral, like your home or car on the line. This article sheds more light on the issue of collateral. The collateral placed on the line would “secure” the money lent. However, if the terms of repayment are breached, the collateral may be seized. The good thing about secured loans, however, is that the interest rates are lower than it is with unsecured loans.
4. Car Loans
You can get a loan to buy a car. This would typically fall under the personal loan type, however, there are some forms of car loans that are specifically made for buying a car, and we will discuss these forms below:
- Personal Contract Plan: With a PCP loan, you would pay a deposit and get the car for an agreed time. Once the agreed time elapses, you may either return the vehicle, or pay a sum of money to fully buy the car or get another in its stead. However, you cannot modify or sell the car during the agreed period because the car is not yours throughout the period.
- Hire Purchase:In this case, you can start using the car while you pay for it in monthly installments. However, the car is not yours until you make the last payment. Some hire purchase requires that you make an initial deposit and then cover the remaining cost with the monthly payments. The car cannot also be taken back if you miss any of the monthly installments.
5. Payday Loan
This is usually short-term but high cost. Like you can guess from its name, payday loans have to be paid back by your next payday. Most states have regulated terms for payday loans, that is, the amount of money you can get, and the interest rate may be dependent on the state you live in. Some states do not even allow payday loans at all.
You would have to give a check that is post-dated which would make the lender able to withdraw the borrowed money and the agreed interest fee automatically from your account on your payday. Payday loans can be relatively easy to get if your state of residency is not against it. However, the interest rate may be a lot higher than other loan types.
6. Title Loans
A title loan is when you use your car to borrow money. You can borrow 25% to 50% of the property’s worth. The credit is meant to be paid back between 15-30 days after it was taken. The property used to get the loan can be taken if the loan is not paid back at the specified date. You would be required to give up your car’s title when you take the loan. The title would be given back only after the credit has been repaid. The downside of this type of loan – as with other types of loans that requires collateral – is that your property may be taken by the lender if you fail to pay back the loan.
7. Payday Alternative
Payday alternative is a sort of short-term credit given by federal credit unions. It is typically a lot cheaper than the regular payday loan and they can be repaid between 1 to 6 months. This makes it a better alternative to payday loans that would have to be paid back in barely a month. The only catch is that membership is required by the federal credit union before a person is given this type of loan. Therefore, if you are notamong the credit union and you need money for an urgent need, you would have to take an alternative instead of this.
Banks as a Loan Source – Advantages and Disadvantages
One major source through which people get loans is the bank. You may visit the website Forbrukslån.no to find out more on where to get great deals. However, bank loans are a lot more serious, so they are usually taken for businesses and mortgage purposes. Therefore, we will now discuss the advantages and disadvantages of taking a bank loan for your business.
The following are the advantages of getting a bank loan…
The bank would never give rules that would dictate how you would have to spend the money you loaned from them. This is a great advantage when placed in comparison with other sources that will place a restriction on what the money loaned can be used for.
2. The Interest Rate is Low
It is general knowledge that banks give the cheapest and best interest rates. So, if a low-interest rate is a major determiner for you when you take a loan, you can be sure to get the best of the best from the bank.
3. You Retain Control
With other sources, you may have to lay down the equity of your business when you have borrowed the money. This is however not the case withthe bank. But, if you fail to make the payment at the agreed time, the bank may take the property which you used as collateral.
1. It is a Complicated Process
Getting a bank to lend you money for your business can be an exhausting process. It usually consumes so much time and you would have to go through so much paperwork, the interest terms may also be complicated. Even when you are done with the initial process, you may likely have to wait for several months before your application is accepted or rejected.
2. Your Business has to be Profitable
Banks will never risk lending a company that has not proven profitability money, whereas other sources may be willing to take the risk.
3. You Need Collateral
A bank usually requires collateral before lending out money; this is usually regardless of how high your credit score is or how profitable your business is.
Taking a loan has been made a lot easier in current times. People usually take loans for a wide range of reasons. However, having a proper understanding of the different types is important for a person to determine which best suits his or her needs.