A loan is a lump sum that you borrow in the hope of repaying it either at once or in time, usually with interest. Loans are usually a fixed amount, like € 5,000 or € 15,000.
The exact amount of the loan and the interest rate will vary depending on your income, debt, credit history and a few other factors. There are many types of loans that you can borrow. Knowing your loan options will help you make better decisions about the type of loan you need to achieve your goals.
Open and closed loans
Indefinite loans are loans that you can borrow repeatedly. Credit cards and lines of credit are the most common types of indefinite loans. Both loans have a credit limit which is the maximum amount you can borrow at a time.
You can use all or part of your credit limit according to your needs. Every time you make a purchase, your available credit decreases. As you make payments, your available increases allow you to use the same credit multiple times as long as you meet the conditions.
Closed loans are one-time loans that can not be borrowed once they have been repaid. When you make payments on indefinite loans, the loan balance decreases. However, you have no available credit that you can use on indefinite term loans. Instead, if you need to borrow more money, you must apply for another loan and start the approval process again. Common types of closed loans include mortgages, auto loans and student loans.
Guaranteed and unsecured loans
Secured loans are loans that rely on assets as collateral for the loan. In the event of loan default, the lender may take possession of the asset and use it to cover the loan. The interest rates on secured loans may be lower than unsecured loans.
You may need to value the property to confirm the value before you can borrow a secured loan. The lender can only allow you to borrow up to the value of the asset. A title loan is an example of a secured loan.
Unsecured loans do not require an asset to constitute a collateral. These loans may be more difficult to obtain and have higher interest rates. Unsecured loans rely solely on your credit history and income to qualify for the loan. If you are in default of an unsecured loan, the lender has to exhaust the recovery options, including the debt collectors and legal recourse to recover the loan.
When it comes to mortgage, the term “conventional loan” is often used. Conventional loans are those that are not insured by a government agency such as the Federal Housing Administration (FHA), the Rural Housing Service (RHS) or the Veterans Administration (VA). Conventional loans can be compliant, which means they follow the guidelines set out by Fannie Mae and Freddie Mac. Non-compliant loans do not meet the criteria of Fannie and Freddie.
Ready to avoid
Some types of loans should be avoided because they are predators and benefit consumers. Payday loans are short-term loans borrowed using your next paycheck as collateral for the loan. Payday loans have high annual percentage rates (APRs) and can be difficult to repay. If you are in a difficult financial situation, look for alternatives before taking out payday loans.
Term loans are not really loans. In fact, they are scams to get you to pay money. Advance loans use different tactics to convince borrowers to send money to get the loan, but they all require the borrower to pay an upfront fee to get the loan. Once the money is sent (usually connected), the “lender” usually disappears without ever sending the loan.