Monday, October 17, 2016, AM | Leave Comment
Whether you are on the lookout for a new house or planning to refurnish the existing one, the main requirement is money.
It is the main hurdle any middle class family faces and because of which usually they are not able to own a house of their own. But a solution to the problem can be applying for loans.
What are loans?
A loan is a specific sum of money borrowed either from money lenders or banks with a promise to pay it back in small amounts over time or all at once.
The exact sum of money to be borrowed depends on a few factors like income of the person applying for the loan, credit and debt history etc.
There are different types of loan available in the financial market. Choosing a loan that meets the demands of your needs could be overwhelming.
Basically there are 7 types of loans available. Understanding them would help to choose the right type to meet your needs.
Let us have a look at all of them:
Open ended Loans
These are the types of loans that can be recurrently borrowed. These types of loans come with a pre-decided credit limit. Credit limit is a fixed sum of rupees (or other currency) that can be loaned at a time. Credit cards and other such lines of credit come under this category.
According to your needs you can use the credit amount in part or completely and the same amount gets deducted from your total credit limit. Once you make the payments, the credit limit comes back to the original amount and you can utilize the same amount again and again.
Close ended loans
As opposed to open ended loans these are one time loans that cannot be used again and again. Once you borrow a close ended loan you can get rid of it only after repayment.
Here, if you are in need of more cash the only option is to apply go through the whole process of loan approval process to apply for a new loan.
These types of loans are dependent upon an asset that has to be handed over to the loan lender in the form of a guarantee or a security against the loan amount.
Also the loan amount is decided upon appraisal of the asset and knowing its correct market value. Upon default in the payment of the loan by the borrower of the loan, the loan lender can take control over the asset used as collateral against the loan amount to regain his loan.
These loans do not need any asset of the person applying for loan as collateral. The interest rates for these types of loans are higher as compared to secured loans and they are as difficult to get since the eligibility for approval of the loan solely depends upon the income and the credit history of the person.
In case of default by the person he has to face lawsuits against him or have to answer to loan collectors or debt collectors.
Conventional loans are the types of loans that are related to mortgage loans but do not qualify for insurance from the government agencies like FHA (Federal Housing Administration), VA (Veterans Administration) or the RHS (Rural Housing Service). These loans follow the guidelines set by Freddie Mac and Fannie Mae.
There are some types of loans which you should avoid like plague because these are the types of loans made to order by the sole purpose of taking advantage of the situation of the borrower. Online Payday lenders and other Payday loans come under this category. These loans have very high interest rates as they are short term loans, the collateral for the loan being your next paycheck.
Advance fee loans
These are not loans but just scams to dupe people into paying a considerable amount as an advanced fee for sanctioning of the loan. Once the loan amount is sent to the moneylender which is usually done by electronic transfer, the money lenders disappears without making any loan payments.
When a person applies for a loan he needs to check not only the economic conditions of the market but also his own financial position as to whether he can make timely payments against the loan or not.
Caleb Wilfred is writer who has written many articles on topics like payday loans, finance news and more niches related to debt. He has more than 3 years experience in writing such kind of articles.