Understanding Different Types Of Loans

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Loans come in all kinds of forms with varied benefits and terms. From simple promissory loans between friends, family or colleagues to the multiple and compact kind of loans that a bank offers such as debt consolidation loans, auto loans, student loans, mortgages, etc.

Banks and credit unions lend loans that are used for significant and multiple purposes from financing a new business to getting a new car or an engagement ring for your fiance. These types of loans are offered to all kinds of people with a variety of obligations to fulfill. Other than that, VA guaranteed loans are only available to specific people.

All loans aren’t equal. People tend to research and educate themselves before selecting a certain type of loan for their situation. Before choosing a loan, its important to keep the credit balance in mind as it helps determine the approval and loan terms along with the interest rate. Companies such as everyday loans provide secured personal loans and improve the financial circumstances of an individual by proposing a savings plan as well.

In this article, we will describe a few different types of loans along with financing and their types and examples. Several types of loans are mentioned below:

  1. Personal Loans
  2. Home Equity Loans
  3. Credit Card Loans
  4. Small Business Loans
  5. Personal Loans:

Personal loans are offered by most of the banks and is used for any kind of expense and financial needs. In addition to that, personal loans are of two types: secured and unsecured. In unsecured loans, an individual does not have to put collateral like a home or a car in case he defaults on his loan whereas in a secured personal loan you’ll have to offer some kind of collateral.

But most people use the unsecured ones for arranging a wedding or paying bills. The loan ranges from a few hundred to a few thousand dollars.

As a general rule, the lender will require some sort of income verification such as a salary slip or proof of other assets. The application for this loan is quite convenient to fill with one or two pages long and approvals and denials take only up to three to four working days.

In short, personal loans are the best ones to consider instead of borrowing money from someone else. However, at some banks, they have high-interest rates while in others they have low-interest based on their policies.

1. Home-Equity Loans:

Home equity is a type of secured loan where your house is supposedly mortgaged. The homeowner borrows the amount against the value of their home. The money borrowed from the bank or union is based on the equity of the home, the difference between the home’s market value or how much the home is owed.

The loan proceeds from home equity loans could be used for various reasons that include debt consolidation. Along with that, the interest rates on this loan are very reasonable as compared to personal loans. Moreover, the terms of home equity loans range from 12 to 15 years which is considerable if you want to borrow a large amount of money.

A home equity loan can be unfavorable if one family member is the breadwinner as the family’s ability to keep up with the monthly payments will become impossible with the person’s death, disability or dismissal of job.

2. Credit Card Loans:

Using a credit card essentially means taking out a loan and drawing a line of credit on the card. Credit cards are accepted by many merchants as a form of payment and are widely used by individuals and companies.

To obtain a card, approximately $5,000 to $10,000 credit should be available. Using a credit card in terms of cash or money is much more flexible. However, it also comes with a pitfall. The interest rates on most credit cards are 25 to 30 percent per year.

The application for a credit card is accepted or denied within a week whereas the telephonic application is answered within a few minutes.

3. Small Business Loans:

To obtain a small business loan an individual must have a strong and proper business plan attached to their application. The requirements to get this loan is to put up collateral to guarantee the loan along with any asset in case the business fails.

The Small Business Administration (SBA) or local banks offer small business loans to start-up entrepreneurs with a reliable business plan and resource ideas. The loan amount ranges from a few hundred dollars to a few million dollars based on the venture and investment plan.

Although there are different policies of different banks and institutions, the average time period to repay the loans is 25 to 30 years. The interest rate depends on the business plan and the amount borrowed for the loan.

Small business loans are definitely helpful in regards to forming up a new business or company. However, the business plan must be strong and definite as it is difficult to get it approved by the institution.

Financing and Its Types:

Loans are basically used for financing purposes. The process of financing includes starting up a business, making certain big purchases or investments. Just like various kinds of loans, there are various kinds of financing options. The two main types of financing options available for companies are:

  1. Equity Financing
  2. Debt Financing

Equity Financing:

Equity financing is a method where capital is raised by selling the company’s stock to the investors or lenders. With the investment procedure, the shareholders also receive the ownership of the capital or company. When it comes to equity financing, you give up some control of your property to someone else. The example of equity loans is a home equity loan or mutual funds with a shareholder.

Debt Financing:

Debt financing is the most common type of financing available. Most people select debt financing where they choose to make payments as per the policy and time period. Debt financing is supposed to be repaid with certain interest rate. The example of debt financing is the bank or institutional loans.

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Sarah Watson is a social media marketer with over a decade of experience in the online world. She has learned what elements make the perfect posts and wants to share this knowledge with fellow marketers everywhere.