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The financing market overflows with numerous types of loans. Evidently, each one is created for distinct specifications. Thus, what would work for some people might not work for others. That being said, we’d like to introduce you to the main types of loans and their features. This information could help you make a sensible decision regarding the best loan for your needs.
Open-Ended and Closed-Ended Loans
One way of distinguishing between loans would be separating them into open-ended and closed-ended loans. The most common types of open-ended loans are lines of credit and credit cards. Moving on, these usually have a credit limit, representing the total amount of money you can borrow at a given time.
Depending on your needs, you can use either all or part of the credit. As you use the credit available, the amount of money you have at your disposal diminishes.
On the other hand, closed-ended loans are one-time loans. With every payment you make, the balance of the loan decreases. Nonetheless, distinct from open-ended loans, you don’t have available credit at your disposal for use. The most common types of closed-ended loans are auto loans, mortgage loans, student loans, and the list may go on.
Unsecured and Secured Loans
Furthermore, loans can be secured or unsecured. In the case of a secured loan, you need to include an asset as collateral. In the case of a loan default, the lender has the right to repossess the asset in order to make up for the financial loss. This is why the interest rates tend to be lower for secured loans than in the case of their counterparts. In some instances, lenders might request to appraise the asset, in order to assess its value.
Moving on to unsecured loans, these don’t require a valuable asset as collateral – as the name entails. However, people with low credit rating could find it difficult to get this form of financing. At the same time, in order to compensate for the risk, these loans come with higher interest rates. That’s because the major elements that are taken into account are your income and credit rating, for the most part.
Short-term loans or payday loans are usually recommended for financial emergencies, as they have a limited lifespan. In general, they are provided by online lenders, whose application process is straightforward and to the point. At the same time, the lending criteria are less strict than in the case of traditional loans; this makes them appealing to people with a poor credit rating.
These loans could make sense in the case of emergencies, but they aren’t really recommended for regular use, as the interest rates and additional fees can be quite high.
To conclude, these are only some of the many types of loans you can find on the market. Considering that every borrower’s needs differ, there is a type of financing that aims at addressing those needs. It’s up to you to do your research and pick a reputable lender and you’ll be on the right path.