If you want to take out a loan then it’s important that you know what you need and what it is that you are looking for. There are of course many different types of loans available on the market, and here is a run-down of the main types so you know your options.
Open and Closed
An open-ended loan is a loan that you can borrow over and over. The most common types of these sorts of loan are credit cards and lines of credit. With these you have a credit limit against which you can make purchases. Whenever you make a purchase, your available credit decreases, while it increases when you make a payment allowing you to use the same credit again and again.
Closed-ended loans conversely, you can’t borrowed more money after you have taken out the loan . As you make payments on these loans, the balance of the loan goes down. If you need to borrow more money then you have to apply for another loan as there is no available credit balance that increases. Common types include mortgage loans, secured loans, auto loans and student loans.
Secured and Unsecured
Secured loans rely on an asset as collateral which the lender can take possession of in the event of a default on the loan. The asset may have to be appraised by the lender before they allow you to borrow. Interest rates for these loans are typically lower than those for unsecured loans. Unsecured loans rely entirely on your credit history and income. If you default on an unsecured loan, the lender has to rely on collection options to recover it such as debt collectors. Whereas for a secured loan the lender can take the security, for example if you default on a loan secured on your home, the house could be repossessed. You can find these kinds of loans from a variety of firms. For example Nemo Personal Finance provide loans secured on your home.
Some types of loans of course are far costlier and tend to be turned to only by people in dire straits. Payday loans in particular are a well known example. These are short-term loans borrowed using your next pay cheque as guarantee for the loan. They have very high annual percentage rates (APRs) and can be very difficult to pay off. So if you’re in financial difficulties, it’s best to look to other alternatives before taking out a costly and problematic payday loan. That way you can look after your finances and have the funds you need to get by.