What Is a Loan?

The term loan refers to a type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value or principal amount. In many cases, the lender also adds interest and/or finance charges to the principal value which the borrower must repay in addition to the principal balance. Loans may be for a specific, one-time amount, or they may be available as an open-ended line of credit up to a specified limit. Loans come in many different forms including secured, unsecured, commercial, and personal loans.

THERE  ARE 4 TYPES OF LOANS

Unsecured Personal Loans

Unsecured personal loans are offered without any collateral. Lenders approve unsecured personal loans based on your credit score. A good credit score will make it easier to get approved. Because there is no collateral involved, these loans are riskier for lenders. They offset this high risk by imposing higher interest rates on unsecured loans.

Pro: You don’t have to put up your home or car as collateral.

Con: You pay a slightly higher rate of interest on the loan.

Secured Personal Loans

Secured personal loans are backed by collateral. Lenders offer unsecured personal loans against your vehicle, personal savings, or any other valuable asset. If you default on your loan, the lender can seize whatever asset you’ve put up as collateral.  Because the risk is lower, you will have a lower interest rate on these loans.

Pros: Potentially lower rate of interest. Depending on the value of the collateral, you may also get approved for a larger loan.

Cons: You could lose your collateral if you do not repay the loan on time.

Fixed-Rate Loans

With fixed-rate loans, your interest rate and monthly payments stay the same throughout the life of the loan.

Pros: Consistent monthly payments make it easier to make and stick to a monthly budget. Also, rising interest rates won’t affect you.

Cons: You won’t benefit in the rare event that interest rates fall.

Variable-Rate Loans

With variable rate loans, the interest rate can rise or fall depending on prevailing market conditions. However, there is usually a cap on how much the rate can change over a specified period of time. These loans usually have a lower APR as compared to fixed-rate loans. Variable-rate loans

Pros: Lower APR as compared to fixed-rate loans. You may benefit if overall market interest rates drop.

Cons: The interest rates and monthly payments fluctuate frequently, making it difficult to set a budget. You may pay a higher rate if market interest rates rise.

BEFORE YOU GET A LOAN

Now a days it’s easy to get loans, but many of the loans really aren’t the kind of loans you as a consumer should be getting. Just because you need money doesn’t mean you should accept anything you can get. Many times when we think we are desperate for money, we make very poor decisions concerning how we go about getting money. However, those decision can cost you far more than they are worth. Some of the worst loans you can get are Pay Day Loans, Title Loans, or using a Check Cashing Place. Those placed don’t necessarily report to credit bureaus and when they do, they only report when you don’t pay. Plus, the money that you borrow is far less than what you pay back. You can end up losing more too like your car, home and much more. So, stay away from those loans if at all possible.

KEY POINTS OF LOANS

• • Loan terms are agreed to by each party before any money is advanced.
  • A loan may be secured by collateral such as a mortgage or it may be unsecured such as a credit card.
  • Revolving loans or lines can be spent, repaid, and spent again, while term loans are fixed-rate, fixed-payment loans.
  • Loans can be a great life saver when you first open a business or in case of an emergency.