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Loans seem to be quite helpful and relieving in times of financial difficulties. Before going in for any kind of loan, you must be aware of its pros and cons. There are different types of loans for different purposes. Here’s a detailed explanation about the kinds of loans that are available to help you make an informed decision. ~ Ed.
The concept of loans is pretty straightforward and simple.
A loan is a debt – usually, a monetary one – supplied by an entity or an individual to another entity or individual, with a known interest rate and time frame agreed upon by both participating parties.
It’s not hard to be certain that lending has been around since the beginning of time.
History of Loans
The earliest documented evidence about loans we could trace back in history would be thousands of years ago left by Assyrians and Babylonians. Merchants back then loaned grain to both traders and farmers.
Even though this was thousands of years ago, much simpler time than today, the dynamic of lending was more sophisticated than one would think.
Lenders could also accept the return of their deposit in more than one form, mixing loaning and trading in their transactions. The notorious interest rates were introduced a bit later, specifically by the Mesopotamians.
Europe caught the fire of loans a bit later, centuries later, due to the church’s newly-thought approach of generating revenue through loans.
Pros and Cons of Loans
The benefits of loans are countless; the spectrum of scale alone spans everything from governments replenishing reserve capital, to individuals borrowing some cash to get by until their next payday.
The number of options and types of loans can be dazzling. Especially, if you don’t have a specific target in mind with a plan that goes along with it, you’d be risking a lot going into a contract without knowing the full consequences of the loan.
There is a reason that debt has become an epidemic, with everyone basically borrowing from everyone from personal financial troubles to the political turmoil that have nationwide or even international ripples.
7 Types of Loans for Different Purposes
In this brief explanation of the different types of loans, I’ll help make sure that you have enough knowledge to see how a loan can benefit and affect you both in the present and the future.
Line of Credit
A line of credit is like an open-loan in which you’re allowed to use money as you go for virtually anything.
This form of loan is perfect for unexpected expenses and for making yourself financially secure enough. You will have access to all of your funds, but you won’t be charged any interest rates until you actually use some or all of the funds.
The interest rate is calculated based on the actual funds taken from the account in total.
Different banks offer unique features for repayment. Lines of credit are known for their flexibility and less rigid rules. As long as you keep repaying what you owe, you can keep using a line of credit.
A secured loan means having collateral, which makes the risk mutually balanced between both the lender and the loaned entities.
Collateral in most cases is usually a house; the value of the securing property is the main variable that controls the total value of the loan. Higher the value of the collateral, higher the limit of the loan.
Secured loans come with the risk of losing the collateral once you’re not able to repay the value of the loan. Since the risk is high for the borrower, the interest rates are substantially lower than loans without collateral, with a higher limit overall.
Almost all big amounts require collateral, making it a lucrative deal for those looking for a serious business venture.
Unsecured loans don’t need any form of collateral to be approved. The risk or consequence of not paying the amount owed agreed upon within the contract is a drastic hit to your credit score which makes getting any unsecured loan quite difficult.
The lack of collateral increases the risk the lender takes. This in turns boosts the interest rates and lowers the possible amount that can be loaned.
A credit score is associated with paying bills on time and many other factors.
The main exception in terms of interest rates and high value is a student loan. Student loans require no collateral yet have a low-interest rate and naturally have a high value.
Long-Term Business Loans
These types of loans are usually of quite high value provided by commercial banks.
Such loans are given to businesses and not to personnel for expansion, acquisitions, refinancing or augmenting capital. Most of the time, the contract is for the loan to be paid on a monthly basis.
Interest rates are relatively low compared to short-term ones. Established businesses or small businesses with substantial growth shouldn’t have a hard time getting a long-term loan approved.
Personal loans are unsecured loans provided by most banks for expenses of ‘personal’ nature. Like buying a commodity that isn’t real estate, a business, or a vehicle. It can be anything from home appliances to getting a pool in your home.
Even though the loan itself is unsecured, lenders usually require proof of assets of an equal or higher value than the loan requested.
The approval process for a personal loan is relatively quick and the cash can be supplied shortly in a few days. Its interest rates are considered high since it’s an unsecured loan.
Title loans are one of the most common secured loans; it uses your vehicle as collateral. It’s a short-term loan that is usually repaid within 1 month of securing payment.
If you’re asking yourself can I get a title loan without a job? The answer is yes. You’ll need to provide a few documents related to the vehicle like the title and a photo ID.
Small Business Loans
Small business loans can be provided by any local bank. This is in addition to a specific entity specialized in providing small business loans called the Small Business Administration.
The value and duration of the loan are dependent on the growth plan provided. The terms may vary depending on the lending entity and the business itself.
Even though it’s a secured loan that requires collateral, the approval process is not as smooth and straightforward like most other secured loans.
Calibrating your needs to fit your personal or business plans is the common aspect that is required to take out a loan and smoothly pay it off.
Instead of pushing for the highest amount a lender is willing to give you, stick to the amount that will set your plan in motion without crippling you later with debt.
Discuss the benefits and risks associated with the loan. Also, make sure to go over each point of the contract.
Over to You
Have you ever taken a loan for personal or business purpose? What kind of loans do you prefer? Share your thoughts and experiences in the comments.