4 Different Types Of Loans

A loan is an amount of money that you as an individual or company can borrow from a lender. That lender could be another company, person or a bank for example. This article will look at 4 different types of loans and how you can use them for your benefit. These are secured and unsecured loans, open end and closed end loans.

1. Type Of Loan: Secured

The first of our 4 different types of loans is a secured loan. This is a common option if you are looking for a larger loan or to pay it back over a longer term. For example, a mortgage is a secured loan, where your home acts as the security in exchange for the interest rate being lower than an unsecured loan. You might also use a secured loan for buying a car.

How Do You Apply

To apply for a secured loan, you must own as asset that you can put down as collateral or security. For example, your home for a mortgage or your car for a car loan.

Benefits

The main benefit of a secured loan is that the interest will be lower than with an unsecured loan, because you’re putting an asset at risk. Also, you can take out a larger amount of money and it typically has fixed payments which can make your budgeting easier.

What Happens If I Default

If you default on a secured loan, your lender has the legal right to take possession of your asset. Which means they can sell your home to regain the money you owe. However, if you realise you are going to struggle to make a repayment, then contact your lender straight away to see if you can arrange an agreement first to pay back the money.

2/ Type of Loan: Unsecured

An unsecured loan is also known as a personal loan. This doesn’t have any collateral or security, therefore you don’t put your home or car at risk through getting an unsecured loan.

How To Apply

Because there is no asset attached, there is a higher risk for lenders with an unsecured loan. If you can’t repay them, there’s nothing for them to claim. Therefore, you usually need a good or high credit score in order to get approval, because lenders can see that you are likely to pay it back.

Benefits

Because an unsecured loan is less complex, it usually means that you can get your money faster, often within a few days. The application itself is often quicker too. Moreover, there’s less risk to yourself because you are not putting up an asset to take out the loan.

What Happens If I Default

If you default on your unsecured loan then this will affect and damage your credit score. A low or bad credit score will make it more difficult for you to borrow a loan in the future. Moreover, your lender can take legal support to make you pay them back.

3. Type Of Loan: Open End

An open end loan refers to any type of loan where you can repeatedly make withdrawals and repayments. For example, a credit card is an open-end loan. Once you have paid off your credit card in full, you can renew it and start again. Moreover, as long as you make your repayments, you can keep using it repeatedly.

How Do You Apply

An open-end loan can be very appealing and provide you with the purchases you want to make. Furthermore, you can apply for multiple credit cards or store cards. Even if you have a low credit score, you are not likely to be turned down for an open-end loan. Each month you must pay a minimum of what you owe, but you can also pay off the entire balance at any time.

Benefits

The benefit to an open end loan is its flexibility. You can use all of your credit limit, some of it or none. You may be charged a monthly or annual fee to keep the credit open, but you’re only charged interest on the outstanding amount you borrow.

What Happens If I Default

If you have multiple credit cards for different purposes, it can build up into a mountain of debt without you realising. Hence you may find yourself starting to default on repayments unless you keep track of your debt. If this is the case, it could lead to serious debt and implications for your financial situation. Creditors will start to chase you for repayments and a low credit score can cause difficulty when applying for larger loans in the future.

4. Type Of Loan : Closed End

The last one of our 4 different types of loans is the closed end loan. The difference with a closed end loan is that it’s taken out for a specific purpose, such as to buy a car or house. Hence if you apply for a closed end loan to buy a car, you can only use it for that purpose, you can’t spend it on a holiday instead for example. When you make your final payment, the loan is closed. So if you need to borrow money again, you will have to take out a new loan.

How Do You Apply

The difference with a closed end loan is that it might be more difficult to apply for than an open end loan. For example, if you have a low credit score, your lender may decide not to loan you the money because you are too much of a risk.

Benefits

The benefit to a closed end loan is that it usually has a lower interest rate than an open end loan. This makes it better for longer term borrowing, so you’ll pay less interest over the term of the loan.

What Happens If I Default

If you default on a closed end loan, your lender can repossess the item that you have purchased. For example, if you take out a car loan and fail to make repayments, they can take the car back. Your personal possessions may also be at risk.

Conclusion

In summary, these are just 4 types of different loans you can apply for, there are other loans available. The key thing to remember with any loan is to make sure that you can make the repayments on time and without it being detrimental to other payments you have. Make sure you read the small print on any loan application and that you understand the implications if you do happen to default on your loan for any reason.

Sometimes, situations happen in life that are out of our personal control. If you do find that you are struggling to make payments on your loan, talk to a debt advice specialist as soon as possible. There may be options for you consider before anything is at risk. It’s important to act sooner rather than later, so don’t just ignore any difficulties.