Loan agreements are available in all forms but have varied terms. Loan types range from simple promissory notes to extremely complex loans including unsecured, mortgage, and student loans. The other financial institutions like credit unions, banks, and lenders give money for buying necessary things like home, car or student loan. Small business loans are available only for selected group of people.
It does not matter if you borrow a simple or complex loan, the repayment conditions are governed by law, so as to protect borrowers from nasty practices like escalated interest rates. Moreover, the loan duration and defaulting terms are clearly detailed, so as to avoid any kind of misunderstanding or possible legal action. The cost of collecting outstanding debt in case of non-payment should be clearly defined.
If you need cash for necessary items or make life manageable then it is wise to familiarize with the types of loans and credits available along with the kind of terms.
Credit type categories for consumers
Open end credits
Open end credits are also called revolving credit. These can be used frequently for buying things, as the credit amount will be repaid every month. However, it is not mandatory to pay the total due amount every month but interest charges will be applied. In general, average interest rates for using credit card is 15% but can be high as 30% and low as 0% [on introductory offers] depending on credit score and payment history of the consumer.
Consumers with history of bad credit find it very hard to find loans, especially at low interest. Non-profit debt management program offers loan for credit score below 500 at low interest rate.
Common revolving credit card form is the credit cards. In addition, there is also the home equity lines of credit and home equity loans that fall under this category.
Closed end credits
This kind of credit is applied to finance specific purpose for a definite time period. Closed end credits are also called instalment loans as consumers need to follow regular payment schedules including interest charge until principal amount is reimbursed.
For closed end credits interest rates differ from one lender to another. It is closely connected with the consumers credit score. If there is a default in single payment, the loaning organization can seize the consumer’s property. Mortgages, appliance loans, car loans, and unsecured loans fall under this category.
Loan types differ as each one is given to be used for some specific purpose. They can differ in terms of time length, calculation of interest rates, and other variables.
- Student loans
- Auto loans
- Personal loan
- Veteran loans
- Unsecured loans
- Consolidated loans
- Small business loans
- Cash advances
- Home equity loans
- Borrowing from family or friends
- Borrowing from life insurance & retirement funds
The list of specific purpose is lengthy but the only thing to remember is – understand the contract fully. Identify the kind of loan you got, repayment terms, connection with your assets, results of missing instalments, and duration of the loan. In case, any word or phrase is not clear, never hesitate to ask for clarification.