Need cash? At various times in our lives we may need cash to purchase a car, pay for a wedding, make an RRSP contribution or to just tied us over until our next paycheck. A loan gives you access to cash now and lets you repay those funds over a period of time. In exchange for this service you will have to pay fees in the form of interest.
Borrowing money for any of these reasons is a good investment because the interest rate at the moment is relatively low.
Regular banks and online banks, as well as other financial companies, offer this banking service to the public for a fee.
When shopping for a loan it is important to know the different types of loans available to you so that you can make an informed decision as to which type of loan suits your particular need.
What is a Loan?
A loan is a debt which specifies the principal amount, interest rate, and date of repayment. You can choose a fixed or variable interest rate and a term of 1 to 5 years.
If a loan is given to an individual it is considered to be a personal loan. This is usually a one time lump sum for a big purchase or home renovation. If a loan is granted to a business it is called a business or commercial loan. Loans are one of the common banking services offered by financial institutions. The amount of money that you can borrow will be determined by your net worth, and thus your ability to pay back the loan. If your net worth is high the financial institution will consider you a good risk and will be more likely to loan you the money.
For a regular loan there is no explicit collateral unlike a mortgage where your property is collateral. The lender looks at your credit history, your income, and your savings to determine if you are a good risk.
Types of Loans Available:
A secured loan is a monetary loan in which the borrower pledges some asset, for example a car or property as collateral
An unsecured loan is a monetary loan that is not secured against the borrowers assets. In this type of loan the interest rate tends to be higher as there is minimal recourse for the lender to recoup the loan if the borrower defaults on the loan.
- Credit Card Debt
- Personal Loan
- Bank Overdraft
- Line of Credit
- Corporate Bonds
These are short term loans, usually less than 6 months, they can be secured or unsecured and have a variable interest rate.
As everyone knows, attending college or university is a very expensive undertaking. How are you going to pay for tuition, books, and transportation never mind accommodation and food. One of the ways that you can pay for your higher education is to apply online for a student loan. Student loans can be subsidized or unsubsidized. I have listed below the major differences between these two options so that you can determine which type of loan is right for you.
- Dependent on financial status and specific need, must qualify
- Do not need to pay back principle until you have graduated from school
- Interest does not have to be paid back while you are still in school
- Specific cap on how much you can borrow
- Subsidized by the Federal Government
- Fixed Interest Rate
- No need to qualify, unsubsidized loan available to everyone
- Do not need to pay back principle until after you graduate
- Interest has to be paid from the time you receive the money
- The amount you can borrow is capped at a higher rate, generally $4000 per year higher.
- Fixed Interest Rate
It is important for young adults to build their credit rating while they are still young, taking out asmall loan and paying it off on time will help build your credit for larger purchases like a mortgage down the road. If at all possible, it is better to pay off the loans quickly to avoid having to pay large amounts of interest.
Concessional Loan or Soft Loan
A concessional loan is offered on more generous terms than market loan. This could be achieved by offering a lower interest rate than those available on the market or by extending the payback terms, or a combination of both. These types of loans are sometimes offered to developing countries that would not be able to afford to borrow money at traditional market rates.
Line of Credit
A line of credit gives you access to funds any time you need them. You can use a line of credit over and over again. This type of loan can be secured or unsecured.
Auto LoansThere are two types of auto loans available to the consumer.
- Direct Loan - A direct auto loan is when a bank gives the loan directly to the consumer
- Indirect Loan - An indirect loan is when you get a loan through the car dealership where you purchase the car. The care dealership is in fact acting as the middleman between you and the bank.
Payday Loans or Payday Advance
A payday loan is a small short term unsecured loan. The idea behind this form of loan is to provide cash to people who need money to tide them over until their next paycheck. However it does not come cheap!
Not everyone can get a payday loan. Applicants must be at least 18 years old, have a bank account and be able to prove that they have steady employment. Unfortunately this business is rampant with people who default on their loans. Lenders must cover their losses by charging exhorbitant levels of interest, that is, the good clients must pay for the bad ones! These high interest rates are out of line with other forms of credit. You can apply for a payday loan online with various vendors.
If you use credit wisely you can save money and improve your financial stability.
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