Credit facilities, usually known as loans, are available in several formats. Irrespective of what kind of institution you borrow money from, the concept of paying back the money and the interest associated with it remains the same. The way in which the money is made available to you and the repayment terms, however, vary significantly. It is essential you know the types of loans available to you before you make your selections.
Open and Close Ended Loans
Close ended loans are the typical loans that you would have heard of. The sum of money that you’ve requested for and which has been approved by the lending institution is paid out to you. You return the sum, together with interest based on the rate of interest approved for the loan, to the institution over a period of time in fixed instalments. These instalments are usually auto-deducted from a particular account of yours monthly. The most common type of loan that falls under this category is a personal loan. Open ended loans, on the other hand, are the ones in which you can borrow money over and over again, provided you have available credit left in that line of credit. The most common examples of this type of loan are credit cards and home equity line of credits (HELOCs). To give you a small example: If you have an approved credit card with a credit limit of $1,000, and the present outstanding balance on the card is $6,000, you have $4,000 left. However, if you make a payment of $3,000 before spending on it any further, then you’d have $4,000 + $3,000 = $7,000.
Secured and Unsecured Loans
As the name suggests, loans that require collateral are known as secured loans, whereas those granted without any collateral are known as unsecured loans. Personal and payday loans are common examples of unsecured loans, whereas mortgages are the most common examples of secured loans. In the event of default, lenders who have collateral will repossess it, sell it, and attempt to recover the monies owed to them. Unsecured loan lenders will put you in a recovery program and chase you until you pay off their debt. Resorting to legal recourses is common in both events, although the severity and penalties associated with unsecured loans are higher unsecured loans’ defaulting.
Most commonly used for property mortgages, these loans are not insured by federal agencies such as the Federal Housing Administration (FHA), Rural Housing Services (RHS), and the Veterans Administration (VA). They comply with guidelines set down by agencies such as Fannie Mae and Freddie Mac. Non-conventional loans do not conform to these guidelines.
Close-ended loans such as payday loans, student loans, small business loans, auto loans, appliance loans, and loans for veterans are to be taken based on requirement only. Try and avoid high-interest loans such as payday loans in order to lessen your financial liabilities. Home equity loans are to be taken with caution too; try not to mortgage your property to the hilt as you run the risk of losing a home to live in should you default of the interest rate shoot up drastically.