A Quick Guide to Understanding the Different Types of Loan

All loans are not the same which is why having an understanding of the different types will allow you to make the right choice when you opt for a loan

00:00 07 October 2021

Knowing which loan to take will enable you to choose one that fits your financial needs. Therefore, in this article, we will reveal and discuss the commonest loan types you can apply for.

 

Let’s get started…

 

1. Personal Loans

 

These loans are very common and are offered by banks and a lot of financial institutions. The great thing about this credit is that it can be given to anyone provided you have a good credit score. Furthermore, you can use the money for anything ranging from paying bills, purchasing home equipment, going on a vacation, etc.

 

There is no pressure on you as it is an unsecured loan; hence, you don’t have to offer any of your assets as collateral that the lender can take possession of in case you default payment. This is unlike a home mortgage or a car loan. Click here to learn about car loan interest rates in 2021. Although your asset won’t be seized if you default your payment; however, your credit score will be negatively affected.

 

Generally, the amount you can get from this credit ranges from hundreds to thousands of dollars. The amount you can get is dependent on several factors including your income, asset, and credit score. The repayment period could be between 2 – 5 years. Hence, you have sufficient time to pay back the loan.

 

While you won’t be putting up your asset as collateral, you will however be expected to submit proof of your assets and income verification of any kind. The asset is expected to have the same value as the money you want to borrow.

 

The loan application is not long; usually just 1 or 2 pages. Hence, you won’t be going through excessive paperwork to get the loan. Also, you wouldn’t have to wait too long for the application decision as you would be informed if the application was approved or denied within some days.

 

Interest Rate

 

If you get this credit from a commercial bank, the average interest rate you should expect for a loan that has a 24-month repayment period is about 10.21%. However, you could end up paying thrice the stated amount. A 3.9% - 35.99% APR range is what most commercial banks offer. If you want the best interest rate, you must have incredible credit ratings as well as significant assets.

 

Personal loans are recommended for individuals who just need little funding for specific needs and are sure that they will be able to pay the money within the specified repayment period. You can also make use of a personal loan calculator to determine the interest rate you can afford.

 

Bank Loan or Bank Guarantee

 

Many folks confuse these two terms because they seem so similar. Hence, we will explain briefly what they are…

 

A bank guarantee is a form of a surety issued to a third party for one of the bank’s customers. Therefore, when the customer defaults payment to a third party, such party is permitted by law to demand that the bank make the payment.

 

This guarantee is not a policy for individuals but for the customers of banks who run small businesses. Hence, it is a business transaction rather than a personal one. A typical example of how this works is when a company asks a contractor whose bid they have accepted to bring a bank guarantee. This will protect the company from any liability should the contractor breach the contract.

 

Since we are talking about businesses, let’s look at a business-related credit next…

 

Small Business Loans

 

These credits are offered mostly by banks and the SBA (Small Business Administration). As the name implies, they are given to small businesses that are just being set up or those that are trying to expand.

 

To qualify for this lending, you need to submit your business plan. The bank will then review the plan extensively to determine if it is worth investing in. Hence, your business plan must be well-written and capable of winning investors.

 

One of the loan terms you will have to agree to as the business owner is that your personal assets will be used as collateral. This will help the bank recoup their money if your business fails to make repayment. Hence, this credit is a secured type.

 

Although you can borrow a large amount depending on your business plan and personal assets; however, you won’t be pressured regarding the repayment. The reason for this is that you have a long repayment period. In some cases, it could be as long as 25 years. Furthermore, the interest rates aren’t fixed; they can be negotiated. Hence, you need to build up your negotiating skills to get the best deal.

 

While this lending has helped so many businesses, it can be quite hectic due to the processes involved which include the creation of the business plan and even getting the bank to approve it. Nevertheless, you can look for online and local resources to help you make the task much easier. SBA resources can be quite helpful if you lay your hands on them.

 

Credit Cards

 

What most folks don’t know is that credit cards are essentially a type of forbrukslån (Norwegian for consumer loans). This is because whenever a purchase is made via your card, you are taking a credit that you are expected to pay back later. If you make full repayment before the due date, you won’t be charged any interest. However, if you fail to complete your repayment, you will be charged interest which you have to pay each month until you clear your balance.

 

The average interest rate for this product is an APR of 16.62%. As far as penalty rates go, you could end up paying as high as 31.49% depending on your credit card if you miss just one repayment.

 

Revolving Debt

 

Credit cards are revolving debts. What we mean by that is that there is a credit limit that is set which the card owner can borrow from and repay later. This can be done continuously without having to submit a new application like a personal loan.

 

While the use of plastic money offers you convenience, you need to be disciplined to avoid overspending. As revealed by a study, most folks spend more when these cards are used rather than cash.

 

Interestingly, the application process for a credit card involves just one page. Hence, it is quite easy to obtain plastic money and go on a spending spree. However, always remember that you will have to pay back whatever you spend.

 

Home-Equity Loans

 

If you own a home, you can borrow against your home equity which you have built over the years. In other words, you can borrow the amount of money of the house’s value that you own. For instance, if you were able to pay off a quarter of your mortgage, then you can borrow a quarter of your home’s value.

 

Enjoy Low Rates at Higher Risks

 

An advantage of this loan is its low-interest rate which is way lower than that of personal loans. You could end up getting an interest rate as low as 5.82%. Furthermore, the 2017 Tax Cuts and Jobs Act made it that the interest on this credit can only be tax deducted if you use the funds received to improve your home or buy it.

 

The disadvantage of this credit is that your home becomes the collateral. Hence, you could end up losing your home if you default payment.

 

Although you can use your home equity’s proceeds for anything; however, most folks use it for expanding or upgrading their homes.

 

Conclusion

 

We hope you now have a good understanding of the most common loan types. Hence, you can decide which one is best for you.