Introduction to Loans
That is no news that loans have settled in our life for good. We turn to loans not only when we have financial difficulties or emergencies which require immediate cash infusion. We use loans in order to purchase homes and cars, make home improvements, get professional education, or start business, etc. In other words, loans make an integral part of our lives and make many important things more accessible.
Loans come in a variety of names, depending on the intended use of money borrowed. The amount of loan you can borrow and the interest rates will basically depend on your age, your credit history and your monthly income. The loan agreement involves your consent to repay the principal of the loan, i.e. the amount that you borrowed, plus interest, i.e. the profit of the lender, in equal repayments. There are many types and subtypes of loans with a variety of rates and repayment track options, which meet the demands of nearly all groups of borrowers. For example, there are special loans for military personnel, typically having low interest rates or at the other end of the spectrum instant payday loans which command much higher rates.
There is a loan type available for nearly every situation imaginable. First off, the loans are divided into two groups: secured and unsecured. A secured loan is any loan which requires the borrower to pledge some asset, like a car or a house, as collateral. It is done in order to decrease the lender's risk. The amount you will be able to borrow and the Annual Percentage Rate (APR) depend on your property value and your ability to repay the loan. If you fail to make payments and default on your loan obligation, you risk losing your assets.
A Home Loan makes a good example of a secured loan type. You can borrow the majority of the purchase price of the home from the bank or financial institution, but the bank retains a lien against the home until the loan is paid off in full. If the borrower fails to pay off the loan, the bank will repossess the house and sell it.
Mortgage is a lien on a house that secures a loan and is paid in installments over a 15 to 30 years period. This is a contractual loan which secures your promise to repay the amount you have borrowed to purchase your home, plus interest and costs. Mortgage payments also include property taxes and mortgage insurance. There are numerous mortgage types as well as many term variations within them: fixed-rate mortgage, adjustable-rate mortgage, hybrid mortgage, government-backed mortgages, interest-only mortgages, etc. Many serious responsibilities come with a mortgage, and understanding the advantages and disadvantages of different mortgage offerings is essential to figure out the best option for you. If you fail to repay the loan, the lender will take back the home and sell it to pay off the debt.
Another example of a secured debt is home equity loans. Using the equity of your home as collateral, you can apply for a home equity loan (HEL). The equity consists of any funds you have invested in your property. The amount you can borrow depends on a number of aspects, such as your existing borrowings, income and assets. Home equity loans come in closed end and open end types and may be useful to finance major home repairs, medical bills or college education, or to consolidate other debt with high interest rates.
You may use a new home loan to pay off one or more existing debts secured against the same assets or property. This is called refinancing. Home refinancing is typically done when interest rates fall below the rate you had on their mortgage when you bought your home. Before making a final decision it is essential to determine whether the amount you save on interests balances the amount of fees you will have to pay during refinancing.
One more example of a secured loan is an Auto Loan, designed for those who want to purchase a car. A consumer can get the loan directly from a bank or financial institution (direct auto loan) or a car dealership can act as a mediator between the bank and the consumer (indirect auto loan).
Unsecured loan, also known as a personal loan or signature loan is based just on the borrower's credit rating and promise of repayment. There is no security in the form of property provided by the borrower. Therefore, this type of loan presents more risk for the lender, which is reflected in a higher interest rate compared to secured loans. In the event of a default the lender will have to sue you to recover their money. A typical example of an unsecured loan is credit card loans.
Very often people apply for loans which they intend to use for their personal needs, for example, in order to travel, to organize a great wedding, go for a honeymoon, or make cosmetic surgeries etc. There are many different types of personal loans available in the US. Personal loans carry a higher interest rate due to the lender's greater risk factor.
In case your business needs additional funding, you can apply to one of the available forms of small business loans. For instance, small businesses and start-ups can take advantage of Commercial Business Loans. Your business will have to repay the borrowed money over a pre-agreed period at a fixed, variable or capped interest rate. If taking out a small business loan, make sure you are aware of any hidden "add on" fees, or potential penalties, like redemption penalties for early settlement of the loan, late payment charges, etc. Always read the small print and make sure you understand the wordings.
If you are going to a college or plan to get a new diploma in some specialized field, you can apply for a Student Loan. Student loans are designed to assist students in payment for professional education costs and costs associated with college attendance. They must be paid back with interest within a specified period of time after the student graduates from college. Student loans are usually issued by the government and normally have a lower interest charges than other loans. They are also often supplemented by student grants. If you fail to make repayment, it will tell on your ability to borrow money for a car, a home and make any other serious purchases in future.
A notorious payday loan (a paycheck advance), a small short-term loan which allows you to borrow from your future paycheck, can be referred to loan traps. These loans have the highest interest rates, and usually have other fees associated with them. This is a very costly loan and unless you can afford the added fees, this type of loan is not the best option and should be avoided. Many US states tend to take the same view on payday loans in their legislation.
In case you have many debts, you can opt to apply to various debt management tools. To put you back in control of your finances, consider such options as debt management, debt consolidation, debt settlement and credit repair. It is wise to seek some expert help in order to find the best possible solution towards your debts if you find it difficult to control it on your own.