Oct 24

Loan and its varieties

What a loan is in actually terms

A loan is nothing but a lump sum of money that you can borrow from a lender with the expectation of repaying it either all at once or in equal installments within a limited period of time along with an extra amount added to the principal amount that is the interest. A loan is in fixed amounts like $100 or $1000. The principal amount and the rates of interest depend on the income, debt, credit history of the borrower. Since there are many kinds of loans available, so it is better to undergo a proper research and seek fruitful suggestions from an expert in financial arena and depending on your purposes, etc choose the appropriate loan to satisfy your goals.

Open ended and close ended loans

Open ended loans are those kinds of loans that you can borrow over and over. The most common kinds of open ended loans are lines of credit and credit cards. Both of these kinds of loans have a credit limit that is the maximum amount of money you can borrow at one time. It is your decision to use partially or all at a time according to you needs. Your available credit will be reduced each time you are opting for a purchase. Similarly, the available credit will increase if you make payments. Therefore by making payments you are offering yourself the scope to use the same credit over and over again as long as you are adhering to the required terms and conditions.

 Close ended loans are one time loan which you can borrow again once they have been repaid. The balance of the loan decreases as you make payments. The provision of available credit is not available here if you need any further loans for any emergency purposes then you can apply for another loan. Then go over the same approval process again. The common examples of close ended loans are auto loans, mortgage loans and student loans for academic purposes.

Secured and unsecured loans

Secured loans are those kinds of loans that depend or rely on any kind of asset as collateral for the loan and the asset may need to be appraised to confirm its value. Under any case of loan default, the lender has the right to seize the possession of that particular asset and utilize it to cover that amount of loan. The rates of interests can be lower of secured loans than those of unsecured loans. A title loan can be a good example of a secured loan.

Unsecured loans need no asset as collateral. They have higher rates of interests and can be difficult to access. They only rely on the credit history of the borrower. The income is essential to qualify for the sanction of loan. Unfortunately, if you are unable to repay the amount then the lender can exhaust the collection options like lawsuit to recover the plan and debt collectors.