The economy is slowly recovering from a worldwide recession. This downturn has hit many areas very hard and here in the United States, while the economic numbers say we are climbing out, it doesn’t seem that way to many people. High unemployment, massive debt and stagnant wages are just three of the problems many families are dealing with. To be able to afford day-to-day necessities, there is a need to be able to borrow money. To meet this need, there are many different types of loans. Those looking to borrow need to figure out which loan type will best fit their own requirements, as each is designed for different situations.
Open And Closed-End Loans
Most people, when they are considering taking out a loan, are usually thinking about closed-end loans. These are traditional loans, made for a specific length of time and for a fixed amount of money (though these terms can occasionally be re-negotiated during the loan payback time), which is paid back over time with interest. Home, car and student loans are classic examples of these. An open-ended loan, on the other hand, is a type of loan, which allows you to borrow a set amount of money over and over again. Two major examples of this type are credit cards and lines of credit that financial lenders (banks or credit unions, generally) offer to customers based on their creditworthiness. A good example of this type of loan is a credit card with a $500 limit. As the amount is used up, you have less to draw upon until that money is paid back. With a good payment history, the general theory is that you will be able to have a larger and larger limit to draw upon over time. With both options, the interest rate that will be charged depends on the type of loan, amount being borrowed, the purpose of the loan and how long you agree to pay back the borrowed amount.
Secured And Unsecured Loans
The main difference between these two types of loans is the amount of risk you offer to the person or institute you are borrowing this money from. With a secured loan, you are offering an item of value, one that the lender will appraise, in exchange for an agreed upon amount. This type of loan is more advantageous to the lender, as they will receive this item from you if you choose not to pay the money back and as a result the interest rates are generally much lower than they would be otherwise. An unsecured loan is riskier for the lender, as the ability to get all of their money back is not guaranteed. This type of loan usually has a higher interest rate and is much more difficult to secure, especially if you have little or no credit history.
Payday And Advance-Fee Loans
These types of loans are more controversial, as the interest rates and fees charged are often quite high. In fact, many states are regulating how much these companies can charge those that use them, calling them predatory lenders. When you compare payday loans against advance fee loans they are usually seen as more legitimate, as they generally do not charge any fees upfront to loan you money. The amount of money that is available to be loaned is generally based on your income and the amount of interest charged is a good deal more than with most other types of loans, though the total amount charged does tend to be less as there is less money being lent. The danger with this type of loan is the terms of payback. If you are not able to pay back all of the loaned amount quickly, the amount that is charged in interest can quickly overtake what you had borrowed in the first place.
Advance fee loans tend to have a bad reputation. These lenders usually offer amazing terms or rates, with little or no credit history, but to get these “loans,” they generally require a fee upfront. This fee is what these types of lenders are most interested in. Once they have your fee, the chances that you will hear back from them can sometimes be between slim to none. Traditional lenders that require fees are usually required to disclose these upfront and they are generally taken out of the loan itself. If you are asked to pay any fee before you receive your money, consider it a red-flag warning sign and look elsewhere.
With every loan, it is very important to do your homework, check out each organization and make sure the terms you are agreeing to will work financially for you. Don’t forget to ask questions if you are unsure about anything. Most importantly, whenever you get a new loan, you are taking on more debt, so it would be wise to set up a budget beforehand and adhere to it after receiving the loan offer.