There are a variety of loans available offered by banks, credit unions, credit card issuers, retailers, finance companies and auto dealers. Companies providing financial products provide credit based on the amount of money you wish to borrow, the purpose for which the money is intended, the length of time needed to pay back the money, and the amount of financial gain the company will receive from lending you the money in the first place.
Long Term Loans
Mortgage lenders and banks make long-term lending agreements for the purchase of a home either to be occupied by the borrower, or to be used as investment properties for rental or resale purposes. Mortgage companies usually make 15-30-yr. loans for consumers wishing to borrow money to purchase a home. In recent times, some companies even make mortgage loans for 40 years. Mortgage loans can be made under variable-rate interest terms or fixed-rate interest terms. Mortgages may also be categorized as either conventional or FHA backed loans, portal.hud.gov. Conventional loans are made directly through a mortgage lending institution and are usually harder to get than FHA loans. They also generally require a down payment of 20% of the loan amount for loan approval. FHA mortgages are backed by the U.S. federal government and have requirements for loan approval that are not as financially restrictive. Many first-time homebuyers qualify for FHA loans.
Personal secured or unsecured loan agreements are offered with the express intention of providing money to the borrower for personal use. This can include money for autos, home improvements, medical expenses or events such as weddings. A debt consolidation loan is one type of personal loan that can be tied to the home’s equity. The advantage to this type of credit product is the low interest personal loan rate in comparison to most credit cards or other lines of credit. Generally, loan terms range from 24 to 60 months.
When a loan is secured by collateral such as a home or auto, it generally offers the consumer more favorable loan terms. Because the bank can legally foreclose or repossess the financed property, they assign the loan a lower interest rate. In the event the borrower defaults on payments, the bank can recoup some of its losses through the proceeds of the sale of the property.Unsecured LoansUnsecured personal loans include loans that are made for personal use that are not attached to the equity of a home or the collateral of a purchase, such as an auto. These include loans made for vacations or other events, home or auto repairs, or funds needed for unexpected expenses or bills. Traditionally this type of loan was known as a, “signature loan” or “good faith loan”.
Short Term Loans
Credit cards are basically small unsecured short-term loans made to consumers with a credit limit. The credit card provider assigns credit limits based on the credit history of the consumer and their ability to pay back the amount owed. A minimum monthly payment on the balance must be made to keep the account current. If the consumer does not pay off the balance at the end of the billing cycle, a finance charge is incurred. Banks, credit unions and other credit card providers make their money on finance charges and late or over limit fees they charge the customer.
Line of Credit
A line of credit product generally allows the consumer to draw funds from an account on an ongoing basis. A personal line of credit refers to an account for individual use, whereas a commercial line of credit is meant for business purposes. A line of credit can be either secured by collateral or completely unsecured.Generally with this type of loan product, the bank charges interest only on the portion of funds withdrawn from the line of credit account.