Looking for a loan? It’s a good idea to understand the different types of loans available, so that you can make the decision that best suits your needs. Having a solid understanding of the types of loans that are available and what each of them entails will better enable you to choose the option that is appropriate for your particular situation. The best way to understand the different types of loans is to view them in four categories, all of which are unique to one another.
These types of loans don’t require that any assets, property or possessions be put up as collateral. Rather, unsecured loans are approved based on the credit history or current income of the individual seeking the loan. Interest rates tend to be higher as the risk to lenders is greater than it is with secured loans. Payday loans, installment loans, and credit cards are the most common types of loans that fall under this category.
A secured loan is one in which the lender has a lien on your assets or property – a car, a home, or some other asset. The exact item(s) used for collateral are dictated by the terms of the loan, and assets must be appraised prior to loan finalization. Failure to pay back the loan can result in the lender seizing the asset. Common types of loans that fall under this category include title loans and home equity loans.
These types of loans allow you to continue to borrow money on an ongoing basis. You borrow against a set credit limit, and as you pay the balance back the credit available to you is replenished. Credit cards and lines of credit are common examples.
Closed-end loans are one time loans that cannot be borrowed again once repaid. Most real estate and car loans fall under this category.
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