Types of Credit and Loans
What are the types of credit?
While there are many types of credit, there are three primary types that we will focus on; revolving credit, installment, and open credit. Credit enables people to purchase goods or services using borrowed money. The lender will then expect to receive payment back with interest after a certain span of time.
A line of credit is one type of credit that will come with a capped limit and can be used up until you reach the predetermined threshold. This can include regular and minimum payments, however, usually, there is not a fixed repayment schedule. An example would be a credit card, as there is a capped limit.
You can keep using this until you reach such a limit. This works on a withdraw, spend, repay revolving cycle. It’s an attractive option.
Installment loans are another type of credit that includes a fixed payment schedule for a specified duration. An example of an installment loan would be a car loan. With these you are required to pay a set amount of money at a recurring interval, for example $250 per month, until the loan is finally paid off in full. Other examples would include a mortgage, student loans, and term loans.
Open credit, on the other hand, is a type of credit that will require full payment for each period, i.e. per month. You can borrow a maximum amount, much like with a credit card, however, you are required to pay the funds borrowed in full at the end of each period.
This might be like a phone bill, where you can make texts, calls and use data per month, but at the end of each month you need to pay for the services that you used. Utility bills are also much like this too.
What are the types of loans?
You can get a loan for pretty much anything that you want to purchase these days, which will give you an idea of just how many types of loans are available. Loan types will also vary because of the options in interest rates, repayment periods, and whether they require collateral or not.
If you need to borrow money to make a purchase, there will be someone available somewhere to lend it to you, and there will be an ideal loan out there somewhere for you too.
You can get debt consolidation loans, student loans, mortgages, auto loans, veteran loans, small business loans, payday loans, cash advances, home equity loans, and of course, you can always borrow from friends and family too! Consult with experts like Gordon Simmons Service Credit Union Leader to figure out the best way to handle your debt.
Secured and unsecured loans.
There are two types of loans you can get; secured and unsecured loans. These two loans are based upon the amount of risk both the lender and the borrower are willing to take. A secured loan means that you, as the borrower, have to put up collateral to back up your promise to repay the loan.
You will risk losing that collateral if you default on the loan. Lenders will also offer lower interest rates on secured loans as they will have the collateral as a fallback.
Homes, cars, boats, and other property are often collateral in secured loans.
Unsecured loans will have no collateral backing them, meaning there is nothing for the lender to repossess or sell in the event that you default. This puts more risk on the lender, and so they will instead charge an interest rate much higher than for secured loans. Credit cards and personal loans are examples of unsecured loans.
Let’s look at some loan types.
One of the most popular types of loan is the unsecured personal loan. Look at personal loans from CreditNinja and you will see that the best thing about them is that they can be used for pretty much anything.
Secured or unsecured, they are an attractive option for people who may have credit card debt. You can use these to reduce your interest rates by transferring balances. However, much like other loan types, the interest rate and terms will depend on your credit history.
Most personal loans will be termed for 12-60 months, with an APR interest range between 6% and 36%. The minimum amount you can borrow is $1000 and the maximum can be up to $100,000, although this varies per lender. The required credit score you need should be above 660, however, you may be able to get this loan type at 610. You can get secured or unsecured personal loans.
Debt consolidation loans.
This type of loan is simply meant to simplify your finances by combining multiple bills for credit cards into a single debt, which will be repaid with one monthly payment. This means fewer payments each month and much lower interest rates. This is just another name for an unsecured personal loan.
Auto loans are secured loans that are tied to your property, they will help you to afford a car, however you will risk losing it if you miss payments. This type of loan can be given by a bank, credit union, online lender, or even the car dealership. Car dealership loans will typically carry higher interest rates and often cost more.