A loan refers to a certain amount of cash borrowed with promise to repay back the amount as a whole or in installments over a period of time with accrued interest. The amount of loan borrowed will depend with the needs of the borrower, his income, interest rates to be paid, debt and credit history among others.
In the financial markets, loans are broadly categorized either as;
Open-ended loans or closed- ended loans
Open-ended loans are the loans that you can borrow a time and again. For instance, credit cards and lines of credits. With such loans, there are credit limits which stipulate the maximum credit that one can borrow at a given time. Every time you make a purchase, your credit limits decreases and when you make payments, your credit limits increases and you can spend more.
Closed-ended loans on the other hand, are one-time loans that cannot be borrowed again once they have been repaid. Every time you make your payments, your loan balance goes down but you are not given any more credit to spend. In case you require more money, you will have to apply afresh.
Secured and Unsecured Loans
Secured loans require that the borrower must present collateral in order to qualify for the loan. The collateral is used as security by the lender in case of a loan default. Collateral may include assets of equal value with the amount borrowed. Therefore, asset appraisal is done in order to ascertain its value. The interest rates for secured loans are relatively lower compared to those of the unsecured loans.
Unsecured loans are given to the borrowers without any collateral. However, due to the high risk of default, the lender charges high interest rates to cater for the risk. Unsecured loans are given to borrowers with better credit history and high income so that they can prove they have capacity of repaying the loans.
Conventional loans
Conventional loans are loans that have not been insured by any government agency. Such loans are popular in Mortgages and they are not insured by; Federal Housing Administration, Rural Housing Service or Veterans Administration. Conventional loans can either be conforming or non-conforming.
Types of Loans to avoid
Payday Loans
Payday Loans are loans to avoid. They are usually short-term loans which are usually given to the borrower through the next pay check which acts as a guarantee for the loan. They are usually offered at very high interest rates and they are not the best in case you have financial constraints since you might not get enough cash to meet obligations.
Advance-fee loans
Advance-fee loans will require that the borrower pays an up-front fee in order to get the loans. They are scams and they are usually used to con people money. Once you send the advance-fee, the lender will disappear with your money and cut down all communication channels to reach him.