Understanding Loan Options
by Sumona Loans & Credit 03 December 2022
Different loans can be used for all sorts of purposes, ranging from covering the cost of a wedding or honeymoon to funding a new business venture.
But not all loans are the same. There are varying interest rates and repayment periods for nearly every type of loan out there.
Because there are so many loan types, you must understand your loan options before signing on the dotted line.
If you’re a local looking for loans Columbus Ohio or simply want to understand more about the available loan options out there, this article is for you.
What Do Different Loans Consist Of?
The different types of loan options available all consist of three things:
- The term of the loan
- The type of interest rate
- The loan type
Before you consider taking out any form of loan to help you cover the cost of an expense, you must understand what loans truly offer.
Loan Term
This refers to the length of time it will take to repay the loan in full. You can choose a set timeframe such as 15 or 30 years, or a smaller time frame that is better suited for your goals.
The decision about the length of your loan term will impact your interest rate, how much interest you’ll pay throughout the loan, and also the monthly interest and principal payments.
Generally, the longer your loan term is, the higher your interest rate will be. Shorter-term loans will have higher monthly payments but lower interest costs due to the reduction in repayment time.
Things To Know
You will likely save money overall with shorter terms as you will not be paying lots of money. However, you’ll have higher monthly payments. This means it is very important to work on ensuring you can cover the cost of these payments before you take on a loan.#
Type of Interest Rate
To start with, you must know that all loans come with two basic variations of interest: adjustable and fixed.
The type of interest that you pay will have an impact on whether your interest rate may change, in addition to how much interest you’ll pay throughout the loan.
Fixed Rate
With a fixed-rate loan, your monthly payments are bound to be considerably more stable. If you want to maintain the same interest rate throughout your loan repayment period, this may be the best option for you.
However, there is still a chance that your total monthly payment will change. This may occur if your mortgage insurance, homeowner’s insurance, or property taxes change in value.
Adjustable (or Variable) Rate
This is where the overall interest rate of a loan can change over time. As a result, monthly payments could go either up or down depending on the way that the interest rate changes.
These will work out to be cheaper in the short term but are far more unpredictable than loans with fixed rate interest rates.
Take the adjustable-rate mortgage (ARM), for example. This is a type of home loan that fluctuates periodically depending on the state of the current market. As a result of this, your monthly interest and principal payment have the potential to double in value.
Type of Loan
The key to understanding different loan options is to learn the difference between the types of loans available. There are three distinct categories you must be aware of:
Conventional Loan
These are the loans that you’re probably familiar with. It is essentially any type of mortgage loan that is not guaranteed or insured by a government agency and is instead available via the private sector.
Secured and Unsecured
A secured loan is backed by collateral, such as a home or car, which is held as a guarantee to ensure the lender receives their money back. These often have lower interest rates and stricter borrowing limits. Common forms of this loan include an auto or mortgage loan.
An unsecured loan does not require an asset as collateral but will only be granted if a lender can trust a borrower’s overall financial condition. They generally have higher interest rates than secured loans. Student loans and personal loans are common forms of this loan type.
Closed vs Open-End Loans
Open-ended loans give a borrower the freedom to repeatedly borrow money. A credit limit is a good example of this type of loan and is the highest amount of money that a borrower can have at any given time. It does come with some restrictions, much like other loans.
Closed-end loans mean individuals cannot borrow any additional money until the first lot is officially repaid. As payments are made, the loan balance gradually reduces. If a borrower wants more money, they must start the application process from scratch. Two common forms of this loan include student loans and a mortgage.
Different Loan Options
With the above factors in mind, there are a few loan options out there that you may want to consider. We’ve listed some of these below for your convenience.
- Bank Loan: money loaned to a borrower by a banking institution for a set period.
- Credit Cards: making payments with a credit card is almost equivalent to taking out small personal loans.
- Personal Loan: a type of unsecured loan that can be used to cover the cost of anything from weddings to home improvements. The lender requires no collateral for this.
- Home Equity Loan: allows people that own their home to borrow against the equity they have generated in them. This essentially means that homeowners can borrow up to the amount of money that they own.
- Small Business Loan: financial aid provided to individuals intending to expand existing businesses or set up new ones. These are typically offered by banks or other financial institutions.
Summary
There are many types of loans available out there for all sorts of reasons. After reading this article, hopefully, you now have a much better understanding of the different loan options available to you in just about every situation, and how they work.
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