Different Types of Loans Explained

Today, there are loans available for every single need from home loans to payday loans. It can be difficult to choose the appropriate loan for your situation. In order to make the choice easier, you must understand the basic types of loans.

Closed-ended loans:  Closed-ended loans are traditional loans where you apply for a fixed sum of money and pay it back in installments. There is a fixed end date and you cannot borrow any more money after the initial amount, unless you apply for another loan. Home loans, car loans, and most kinds of personal loans come under this category.

Open-ended loans: These types of loans include credit cards and lines of credit where you keep borrowing money as long as you make timely payments. This amount is not fixed and you can pay off the full amount or pay a portion. These are useful if you require large sums several times over a period of time. Credit cards have higher interest rates than lines of credit, but lines of credit require security, usually home equity.

Secured and Unsecured Loans: As the name explains, secured loans have to offer assets as security. Car loans, home mortgages etc. are examples of this. These typically have lower rates of interest as the creditor has less risk of non-repayment. The creditor simply takes possession of the asset if the loan is not repaid.

Unsecured loans are loans which do not require any security. They have much higher rates of interest since they are riskier to both creditor (chance of non-repayment) and debtor (might end up with a loan they cannot repay).They usually depend on your credit score and require some fixed source of income. They are usually short-term loans for small amounts like payday loans. A special note on those: There’s a lot of fraud going around so make sure you go somewhere where different lenders are compared for you and you are offered help to find the right payday loan for your situation.