Who has not had one loan, at some point? Just like money, loans became essential to the way the society lives, and aims to live. A simple definition for the financial term ‘loan’ – is to grant money, property or material goods to a party in exchange for future repayment of the specific amount of the loan (plus interests and other financial charges). Most of the loans are formalized in writing, where all the rights and obligations are specified. There are two main categories of loans: 1)Open-end loans (also known as, revolving credit); and 2) Close-end loan. And Open-end loan is when you can borrow repeatedly; the best way to illustrate these loans, is with the credit card or lines of credit; in both these cases, you have a credit limit to what you can purchase against; you purchase, the credit decreases; after you make a payment the available credit increases again.
As for closed-end loans, after you’ve repaid the loan, you cannot borrow again. When you do payments, the balance reduces; if you need more, you have to apply for it all over again. These loans are usually used as mortgage, auto loans and student loans. In the close-end loans, we can distinguish them into two categories: secured or unsecured loans. The secured loan implies there is something given as collateral against the amount borrowed (most common example, mortgage or auto loans); as for the unsecured loan, no collateral is yielded by the borrower, and is based on his income and/or credit history. On the unsecured loans, there is a frame of choices: personal, student, payday loans, etc. In the event that you fail to pay your loan in a timely manner, you run the risk of having the delinquent loan sent to a collection agency, like Lvnv Funding. So, borrower beware!
A mortgage loan is basically a part of everyday financing, and is a common type of debt instrument. In these cases, money is used to buy property, but that property “stays” with the bank until the mortgage payment is paid-in-full; this way, if the borrower fails to comply with the payments, the bank can repossess the property. The “secure” part of the loan only applies to the lender, never to the borrower. The positive features of the secure loan to the borrower, are the ease in which they can obtain an unsecure loan – more often granted to those who are in good financial positions (in terms of income & credit); it also benefits the borrower by allowing bigger sums of money to be extended; the time span over which the loans are to be paid, are extended for longer periods in time.
As for auto loans, they can be facilitated by a bank, or by the car dealership directly; although dealership loans may be more helpful and advantageous, overall, they cost more. On secured loans, the interest rates are influenced by the loan size, time-length, your credit score and the free equity of the property or asset.
Unsecured loans can be for several purposes: from covering credit debts, to personal, student and payday loans. Here, the lender does not have a specific property/good to hold, in case of forfeiture of payments or even bankruptcy declared by the borrower. Therefore, creditors usually apply extremely high interest rates and smaller time lengths. One must make sure that they can handle the financial burden of an unsecured loan, as failure to pay it can lead to harassment & court cases by debt collectors, like Cbe Companies cedar falls.
Here’s a look at some of the more typical unsecured loans.
Student loans are given to enable students to complete their studies; these are usually paid off after graduation, and they can be either subsidised – when the Department of Education pays the interests of the loan; if it’s unsubsidized, the loan does not incur interests while the student is in college. Personal loans help the borrower to face day-to-day bills and/or emergencies such as medical, vacations, repairs on the house or debt consolidation; personal loans tend to be lower than $5,000, and is amortized (reduced) over a fixed period of time – through regular interest payments that reduces the principal balance of the loan.
On the contrary, if the borrower needs help with a business, as in to fund large capital expenses and/or operations it cannot otherwise afford, a commercial loan is needed. Most small businesses, because of upfront costs, and the plethora of regulation-related obstacles, do not have direct access to it. Borrowers must avoid certain types of loans, like payday loans that uses your next paycheck as collateral, and advance-fee loans. Not at all loans, but some, rely on deception to take money from prospective borrowers.