Learn what a loan is and some of the most common types of loans that people get. Find out
which loans are best for different situations and some of the advantages and disadvantages of
getting a loan.
What is a Loan?
If you have never received a loan to purchase something, you are certainly in the minority! Loans
can be a great thing, but they can also get you into trouble. One of the keys to being financially
successful is understanding
when loans are a good solution for your situation.
Loans are never a good idea if you can’t afforad to pay them back in the required time frame.
Let’s explore what a loan is and find out some of the common ways to borrow money.
A loan is when you receive money from a friend, bank or financial institution in exchange for
future repayment of the principal, plus interest. The principal is the amount you borrowed, and the
interest is the amount charged for receiving the loan. Since lenders are taking a risk that you may
not repay the loan, they have to offset that risk by charging a fee- known as interest. Loans
typically are secured or unsecured.
A secured loan involves pledging an asset (such as car, boat
or house) as collateral for the loan. If the borrower defaults, or doesn’t pay back the loan, the
lender takes possession of the asset.
An unsecured loan option is preferred, but not as common.
If the borrower doesn’t pay back the unsecured loan, the lender doesn’t have the right to take
anything in return. Learn What A loan Is And Some Of The Most Common Types
Types of Loans
Personal loans- You can get these loans at almost any bank. The good news is that you can
usually spend the money however you like. You might go on vacation, buy a jet ski or get a new
television. Personal loans are often unsecured and fairly easy to get if you have average credit
history. The downside is that they are usually for small amounts, typically not going over $5,000,
and the interest rates are higher than secured loans.
Cash advances- If you are in a pinch and need money quickly, cash advances from your credit
card company or other payday loan institutions are an option. These loans are easy to get, but
can have extremely high interest rates.
They usually are only for small amounts: typically $1,000
or less. These loans should really only be considered when there are no other alternative ways to
get money.Learn What A loan Is And Some Of The Most Common Types INSURANCE PLAN
Student loans- These are great ways to help finance a college education. The most common loans
are Stafford loans and Perkins loans. The interest rates are very reasonable, and you usually
don’t have to pay the loans back while
you are a full-time college student. The downside is that
these loans can add up to well over $100,000 in the course of four, six or eight years, leaving
new graduates with huge debts as they embark on their new careers.
Mortgage loans- This is most likely the biggest loan you will ever get! If you are looking to
purchase your first home or some form of real estate, this is likely the best option. These loans
are secured by the house or property you are buying. That means if you don’t make your
payments in a timely manner,
the bank or lender can take your house or property back! Mortgages
help people get into homes that would otherwise take years to save for. They are often
structured in 1o-, 15- or 30- year terms, and the interest you pay is tax- deductible and fairly low
compared to other loans.
Home-equity loans and lines of credit- Homeowners can borrow against equity they have in their
house with these types of loans. The equity or loan amount would be the difference between the
appraised value of your home and the amount you still owe on your mortgage.
These loans are good for home additions, home improvements or debt consolidation. The interest rate is often tax
deductible and also fairly low compared to other loans.
Small business loans- Your local banks usually offer these loans to people looking to start a
business. They do require a little more work than normal and often require a business plan to
how the validity of what you are doing. These are often secured loans, so you will have to
pledge some personal assets as collateral in case the business fails.
Advantages of Loans
Business growth and expansion- Loans are a great way for a business to expand and grow
quicker than it otherwise could. Access to additional money helps businesses hire more employees,
buy inventory and invest in needed machinery.
The loan is not repayable on demand and so available for the term of the loan- generally three to
ten years- unless you breach the loan conditions.
Loans can be tied to the lifetime of the equipment or other assets you’re borrowing the money to pay for.
At the beginning of the term of the loan you may be able to negotiate a repayment holiday,
meaning that you only pay interest for a certain amount of time while repayments on the capital
are frozen.
While you must pay interest on your loan, you do not have to give the lender a percentage of
your profits or a share in your company
Interest rates may be fixed for the term so you will know the level of repayments throughout the
life of the loan.
There may be an arrangement fee that is paid at the start of the loan but not throughout its life.
If it is an on-demand loan, an annual renewal fee may be payable.
