Loan contracts come in all sorts of forms and with varying terms, ranging from simple promissory notes between friends and family to more complex loans such as mortgages, autos, payroll loans and student loans. Banks, credit unions and other people lend money for meaningful but necessary items such as a car, study or home. Other loans such as small business loans and for retirees are available only to groups of people.
Regardless of type, each loan and its payment terms is governed by federal guidelines to protect consumers from unpleasant practices such as excessive interest rates. In addition, loan duration and default terms must be clearly detailed to avoid confusion or possible legal action.
In the event of default, the terms of recovery of outstanding debt shall clearly state the costs involved in collecting the debt. This also applies to the parts of the promissory notes. If you need money for an essential item or help make your life more manageable, it is good to familiarize yourself with the types of credit and loans that may be available to you and the types of terms you can expect.
The two basic categories of consumer credit are open and closed credit. Open credit, better known as revolving credit, can be used repeatedly for purchases that will be paid monthly, although it is not necessary to pay the full amount due each month. The most common form of revolving credit are credit cards, but overdraft and personal loans also fall into this mode.
Closed credit is used to fund a specific purpose for a specific period of time. They can also take a form of a financing because consumers are required to follow a regular (usually monthly) payment schedule that includes interest, until the principal is paid off.
The interest rate for loans and financing varies according to the lender and is closely linked to the consumer’s credit score. Generally, there may be certain guarantees for the payment of the loan, especially if it is the financing of a property, such as a car or house. In these cases, the lender can take the item from who is doing the financing to pay off the debt.
Understand the different types of loans and see how to take advantage of each of them. (Photo: Loan Data Corp)
Types of bank loans
Types of loans vary because each loan has a specific intended use. They can vary by time period, how interest rates are calculated, when payments are due and by a number of other variables.
Student loans are offered to college students and their families to help cover the cost of higher education. There are two main types: federal student loans (FIES) and private student loans. Loans funded by the federal government are better as it usually comes with lower interest rates and more favorable repayment terms to the borrower.
Mortgages are loans distributed by banks to allow consumers to buy homes that they can not afford in advance. A mortgage is tied to your home, which means that you run the risk of being mortgaged (having the home taken by the bank) if you are late on payments. Mortgages have among the lowest interest rates on all loans.
As mortgages, car loans are tied to your property. They can help you pay for a vehicle, but you run the risk of losing the car if you miss the payments. This type of loan can be distributed by a bank or the car dealership directly, but you should understand that although the concessionaire’s loans may be more convenient, they usually carry higher interest rates and end up costing more overall.
Personal loans can be used for any personal expenses and do not have a specific purpose. This makes them an attractive option for people with outstanding debts, such as credit card debt, who wish to reduce their interest rates by transferring balances. Like other loans, personal loan terms depend on your credit history.
Loans for retirees
Financial institutions have loan programs available for retirees and their families. They are usually payroll loans, tied directly to the retirement benefit. However, they are loans with lower interest rates and advantages.
Small Business Loans
Small business loans are awarded to entrepreneurs and aspiring entrepreneurs to help them start or expand a business. Among the sources of loans for small businesses, BNDES deserves special mention.
Loans with financial
Financial loans, other than paycheck cases, are short-term, high interest loans designed to fill the gap from one paycheck to the next, used predominantly by people without financial planning who live from paycheck to paycheck. We strongly discourage consumers from contracting these loans because of their high costs and interest rates.
Public employees, pensioners and retirees, as well as some private sector employees, can obtain payroll loans, with the installments directly discounted from the salary.
A consolidated loan is meant to simplify your finances. Simply put, a consolidated loan pays off all or several of your outstanding debts, especially credit card debt. This means less monthly payments and lower interest rates.
Loans from friends and family
Borrowing money from friends and relatives is an informal type of loan. This is not always a good option because it can hurt a relationship. To protect both parties, it is a good idea to sign a basic promissory note.
A cash advance is a short term loan against your credit card. Instead of using the credit card to make a purchase or pay for a service, you use a bank or ATM and receive money to be used for whatever purpose you need. Note that interest is high and there may be a fee charge for the service.
Loans with attachment
You can pawn goods like real estate, cars, jewelry, or use them as collateral on loans. Interest is generally lower, but you need discipline in payments to avoid the risk of losing your asset by not repaying the loan.
Where to get loan?
Whenever you decide to borrow money – be it to pay bills or buy a luxury item – make sure you fully understand the agreement. Find out what type of loan you are getting and whether you are linked to any of your belongings. Also, familiarize yourself with your repayment terms: what your monthly obligation will be, how long you will have to repay the loan, and the consequences of missing a payment. If any part of the agreement is not clear to you, do not hesitate to ask for clarification or adjustment.
The best place to apply for loans are reputed financial institutions. Financials rarely have better conditions, but it is good to research to compare rates. Above all, be prepared for the payments and plan your financial life so you do not have to use the loan again.
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