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Tuesday, January 21, 2014

A guide to different types of loans

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Suitable loans match borrowing requirements
By Jocelyn Williams

There are a lot of different situations where you may need to borrow money for things that you are not able to afford to pay for immediately. When this happens to you, you will need to think carefully about the type of loan that you decide to take on.  

There are many different loan types, all with different terms and conditions and all of which have different advantages and disadvantages.  You’ll need to choose the loan that makes sense and that provides you with the financial resources you need in the short-term and with a payment plan you can afford over time.

Different types of loans

Here are the few of the different types of loans that you can consider when you need to borrow money.
  • Mortgage loans
A first mortgage or a primary mortgage is given for a specific purpose only: to buy a house.  SF Gate provides a comprehensive list of the advantages and disadvantages of a mortgage loan. The basic fact, though, is that almost everyone who buys a house needs to take a mortgage loan since there are very few people who could afford to pay 100 percent in cash for their home.

Mortgages or home loans are secured debt, which means that there is an asset that acts as collateral to guarantee the loan. The home is the secured asset. If you do not pay your mortgage loan, the lender can foreclosure on the house and resell the home to get the money to repay the debts that you owe.  Because a mortgage loan is secured, it is not very risky for a lender to loan money for a mortgage.  As such, mortgage loan rates are usually relatively low for qualified buyers and a mortgage is generally the lowest cost type of loan you can take. Mortgage loans also provide the benefit of being tax-deductible.
  • Home equity loans
Home equity loans allow you to tap into the equity in your home, and you can use the money for pretty much whatever you want (in most cases). To take out a home equity loan, you need to owe less on your house than your home is worth and you need to convince the lender to allow you to qualify for the home equity loan. Once you have borrowed the money, you can use it to pay down debt, start a business or accomplish other goals.

Home equity loans usually have a relatively low interest rate and the interest is tax deductible under certain circumstances. However, there are some significant downsides associated with home equity loans. One problem is that you may have a difficult time qualifying for a loan as lenders have tightened standards for approving home equity loans. Another big issue is that you put your home at risk when you take on a home equity loan. If you take out this type of loan and you later cannot pay your bills, you could end up losing the home. With other types of unsecured debts, your home is not usually in danger of being lost if you cannot pay.
  • Personal loans
Personal loans are loans that you apply for from a bank or lender. You can use the money to do whatever you want to. There is no collateral for a personal loan, so banks are going to be willing to lend you the money only if they are fairly sure you are going to be able to pay it back (this determination is made based on your credit score and other factors). Personal loan rates are also going to be higher than loan rates for other kinds of debts like mortgages and home equity loans since there is a bigger risk for lenders.
  • Credit cards
A credit card is actually a type of loan, although it is different from a personal loan or a mortgage. A credit card is revolving debt, as you are given a maximum amount that you are allowed to borrow but you don’t have to max out the credit limit and borrow the full amount. Credit cards usually have a higher interest rate than mortgages, personal loans and home equity loans. They are unsecured debt so there is no collateral for lenders to take if you don’t pay, and you generally need to have pretty good credit to get a credit card.
  • Payday loans
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Payday loans are state regulated financial instruments
Payday loans are available much more quickly than other types of loans, through services like Instaloan.com. These are also a short-term loan option (one of the few that exists) and an option for people with bad credit, making them a good choice when you need money right away.

That’s it. A guide to the most common type of loans. Hopefully it helps you make an informed decision!

About the author: Jocelyn Williams knows money. She can make it, invest it and give you advice on what to do with yours. And she also happens to love to write.

1 comment:

  1. Well, today’s market offers us a variety of loans and sometimes it’s easy to get confused. But it’s necessary to know at least basic information about it otherwise there’s a risk to get in trouble or to make a serious mistake. Consumers often use credit cards and cash advance loan services online to buy essential goods. There are many opportunities to borrow money today because lending services in products are in demand. At the same time many consumers complain that they have debts and can’t eliminate them. I think that it’s very important to know when taking out a loan makes sense and when it’s better to avoid it.