Consumers often take on loans to finance purchases for various purposes such as for education, purchase of a home, a vehicle, or just for the general expenses of the family or the consumer. Some would also take on lending to finance their starting business to have capital, purchase equipment, or for purposes of expansion.
Whatever the purpose people resort to borrowing money to finance various undertakings and because of this, there are also various types of loans to accommodate the growing needs of consumers for money.
In simple terms, a loan is the lending of money by one person to another person, groups of persons, or entities and the borrower becomes indebted to the lender and may be liable to pay a fixed amount of interest until the debt is repaid according to the terms of their agreement. Click here for more information on other types of debt including loans.
Types of Loans
There are different types of loans to accommodate the needs and financial capacities of different consumers. The different types also have different limits on the amount to be borrowed, the schedule of payment, the interest to be paid if any, and needs to be backed by collateral. Consumer loans are usually in the form of installment wherein the borrower pays the amount borrowed in fixed intervals of time, usually paid monthly or annually.
The first type is a secured loan. This requires the borrower to put up security, financial assets that you own like a piece of land, a home, a motor vehicle, or other financial interests that can be used as payment to the lender if the borrower fails to pay the loan.
The most common way a lender makes sure that the security or collateral is in effect is by putting a lien on the property or financial interest set up as collateral and is in effect until it is fully paid and if the consumer or borrower fails to pay the lender can sell the collateral or take possession or ownership as payment for the borrowed money.
Contracting a secured loan has several advantages not only to the lender but also to the consumers. Lenders are more likely to give the borrower greater amounts to finance their expenses, give a longer period to pay, and lower interest rates since the lenders are already encouraged to pay the loan on time because of the possibility of losing ownership over the things put up as collateral.
Also, if you have not established a good credit reputation, lenders would be more inclined to accept your request for a loan if you provide security.
There are also different types of secured loans depending on the purpose for borrowing money and the collateral given by the consumer. The first is a mortgage which is used by consumers or borrowers to finance the purchase of a home.
The home purchased will be the security of the lender and if the borrower fails to pay the loan the home can be foreclosed and consequently, the borrower will lose ownership and possession over the home. This is the most common lending type since homes cost far more than what an average person makes in a year.
Another type is tied to immovable property which is for the purchase of a piece of land which is sometimes called a loan for land which uses the land purchases as collateral. The second most common type is a vehicle or auto loan. This is a borrowed money to finance the purchase of all kinds of motor vehicles such as cars, motorcycles, or even boats and airplanes.
Similar to a mortgage loan, the thing purchased is used as the collateral and in the event, the borrower fails to pay the vehicle can be taken by the lender and possess or sell it for the satisfaction of the debt.
The third is a more versatile type which is the business loan. It is more versatile because the things to be purchased can vary depending on the type of business. A business engaged in garbage collection might look for a secured loan to buy a new garbage truck, like the previously discussed types, the thing purchased will stand as the collateral.
The last is a secured credit card. While most credit cards are unsecured loans and are the most commonly used type, some lenders would require collateral for a borrower to have a higher borrowing limit.
Unlike the other types which require a physical asset to be used as collateral, lenders at times allow a credit cardholder to make a deposit of money to be used as security for payments.
Unsecured loans are credits without collateral. Unsecured loans are normally granted by the lender to those it trusts for a variety of reasons but more often than not because of the borrower’s creditworthiness or credit standing. The most common type of this is a credit card.
Since unsecured loans rely on the trustworthiness of the borrower, consumers often can only borrow up to a fixed amount of money which is smaller than what a consumer can get if he setups a collateral and contracts a secured loan, which generally has higher interest rates and a smaller time frame to pay the loan.
This also comes with the problem of who is willing to lend out money without any collateral, but this comes with the advantage of not having to worry about losing ownership of the collateral and. This does not mean that the lender would have no options to enforce your agreement to pay the loan. The lender can collect it himself by availing of legal remedies and going to court or the lender may ask a collecting agency to take action.
With the possibility of high-interest rates, a very short period to repay the borrowed money, and other conditions, it is important that you contract loans from reputable lenders that do not impose harsh conditions visit Forbrukslån.no for more information on unsecured loans and the ideal institutions to contract an unsecured loan.
Like secured loans, there are also different types of unsecured loans. The two most common types are term loans and those involving revolving credits such as credit cards.
Nowadays the most prevalent type of unsecured loan is a credit card which gives the consumer or borrower something called revolving credit. Essentially with revolving credit, a credit card holder is allowed to borrow repeatedly until a threshold is reached while being required to repay the previous debts on specific dates agreed upon.
But some credit cards can be secured loans, some financial institutions require security for a consumer to have access to a higher borrowing limit. The reason why credit cards are so popular is the ease of use and convenience of not carrying around large amounts of money.
A term loan on the other hand is paid in installments until the whole amount is paid. While this type is more commonly viewed as a secured loan, some lenders allow unsecured terms and are in reality, gaining popularity.
To conclude, there are many types of loans suited for the various needs and capacities of consumers.