Different Types Of Loans

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The following is a guest post. Enjoy!

Different Types Of Loans

 

 

The time may come that you need to borrow money. You may need money to pay for your kid’s education, to buy a new car, or some furniture for the house. You should be familiar with the different loan products that exist so you can select the perfect one for your situation. Let’s take a look at a few of the more popular loans out there:

Unsecured Loans

Unsecured loans are for those that either have good credit or no credit. These loans do not require collateral and are typically given on the basis of income or credit. Financial institutions are taking a big risk when they give an unsecured loan because they have no underlying security to guarantee the loan.

Good examples of unsecured loans are signature loans and credit cards.. Banks and credit card companies are granting you a line of credit in hopes that you will repay the balance. The good thing about this is that it makes it easy to build credit. The only bad part is that the bank could find itself on the hook with little recourse in the event of a default.

Secured Loans

Secured loans are far more common than unsecured loans. These loans are normally backed by some asset or form of collateral. For example, a home stands as the collateral for anyone that gets a FHA or traditional mortgage loan. The car that is purchased acts as security for the automobile loan that is given. Even secured credit cards use a cash deposit as a way of guaranteeing the credit limit.

Personal loans are an example of a loan product that can be either secured or unsecured. It is important to know this in case you need help choosing a personal loan. Secured loans are far less risky for banks to make since they know they have an asset that they can repossess. The lender can regain possession of the asset and sell it to recoup some of the money that was loaned out.

Demand Loans

Demand loans can either be secured or unsecured. These are loans that are only for a short term time period and have to be repaid almost immediately. A demand loan is useful if you need some cash for a business to make payroll or need to borrow some cash for a few months. It is important to note that the money lent in a demand loan can be called in at any time.

How about you all? What types of loans have you taken out in the past? Have you used any of the types of loans mentioned above? Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

  • @ Unsecured loans – 
    • It’s important to note that since unsecured loans expose the banks to a significant amount of risk, they must be compensated for this increased risk/return ratio by demanding a higher interest rate. 
    • This is the exact reason why the interest rate on credit cards is higher than many types of secured loans. It’s all about that risk/return ratio!
  • @ Using secured loans to build credit – 
    • In a previous post, I’ve discussed how I (and you as well!) can successfully use a secured personal loan in order to start building a credit history. This especially works well if you are younger and don’t have established credit already.
    • In my case, I secured the personal loan with a CD that I took out from the same bank with which I took out the loan. This enabled me to keep the interest rate low on the personal loan.

***Photo courtesy of http://farm4.static.flickr.com/3082/4557765121_17d83c918f.jpg

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