Types of Personal Loans

15:54 06 November 2019

The financial sector is booming - with lots of lenders giving different loan facilities on the market. Plus, technology has made it easy for people to secure loans from the comfort of their mobile phones. With loans, you have a solution to different financial situations. But do you understand different loans on the market today? Well, loans come in different types. Thus, understanding different types of loans will help you get the best credit facility for all your financial needs. With that in mind, here is all you should know concerning different types of loans and how to secure the best credit facility for all your financial needs.

Closed-Ended vs. Open-Ended Loans

A closed-ended loan can be defined as a one-time debt a borrower incurs which should be repaid based on predetermined
payment terms. Common examples of closed-ended loans include auto loans, mortgage loans, as well as personal loans.

On the other hand, an open-ended loan represents a revolving credit facility that allows you to borrow -but you must do it from a preset credit limit. The best examples of open-ended loans include a credit card, home equity, etc.

Fixed-Rate vs. Variable-Rate Loan Facilities

Personal loans can also be divided based on the interest rate charged. For instance, a fixed rate doesn’t change. Thus, you will be paying a fixed amount per month. The rate doesn’t vary. The amount you will be paying for that period is fixed. On the other hand, a variable interest rate loan entails a changing monthly interest rate. The interest rate chargeable is dependent on the market forces. It’s also important to note that interest rate can drop—which can hugely benefit you. However, if the interest rate rises, you will pay more.

Secured vs. Unsecured

Personal loans can also be divided into secured and unsecured loans. With a secured loan, you must deposit collateral to get your loan approved. The collateral is meant to reduce the risk on the side of the creditor. Thus, secured loans come with lower interest rates than their unsecured counterparts. However, failure to meet the repayment obligations will lead to the seizure of your collateral. The collateral will then be liquidated to cover that financial obligation.

On the other hand, unsecured loans don’t require collateral. This means that you will be paying a higher interest rate. Common examples of unsecured loans include credit cards, utilities, and student loans. With unsecured loans, your lender doesn’t have a legal right to seize your property in case you fail to repay your loan.

Consequently, unsecured loans involve higher interest rates.

Key Takeaway

Before taking any type of loan (long term or short term), consider your preferences. Then go to your financial muscle. Take a loan you can repay. Consider interest rates. Do your research.

The Bottom-Line

Understanding different types of loans will guide you to choose the best credit facility for your financial needs. The above are common types of loans. So, understand each type before you make a move.