Borrowing money can sometimes be very overwhelming. One reason is that there are plenty of lenders to go to and another reason is that there are many types of loans to choose from. If you are new to loans though, it is important to be knowledgeable of your options to know which one really fits your needs. Loans can be categorized into 5 types and these are:
1. Open-ended loans
2. Close-ended loans
3. Conventional loans
4. Secured loans
5. Unsecured loans
Open-ended loans are loans that you can take repeatedly. Examples of these are your credit cards. The way these work is that you will be given a maximum line of credit. You will be allowed to use these loans until you have exhausted your credit limit.
Close-ended loans, on the other hand, are designed for one-time use. Once you’ve taken out such a loan, you will not be allowed to take another loan unless you’ve paid off the first one. Examples of these loans are auto loans.
Conventional loans are not insured by the Federal Government. Instead, they abide by the guidelines set by Fannie Mae and Freddie Mac. However, these loans may also be non-conforming and may not follow the guidelines by Fannie Mae and Freddie Mac. Thus, when dealing getting this type of loan, it is very important to read the contract fine print to know what you are getting into.
Yet another type of loan would be the secured ones. These loans are secured on an asset. In an event that you are unable to pay back the loan, the lender can take possession of the collateral you pledged against the loan. The good news with this type of loans is that the interest rate could be lower than in other types of loans.
The counterpart of the secured loans is the unsecured loans. This loans require no collateral. Traditionally, lenders of unsecured loans will have to rely heavily on your credit score so you can avail of the services. These days, however, you may be approved for such loans even if you have a bad credit.
These five types of loans come with their own set of pros and cons. It is advised that before you choose on which to use, it is best that you consult with a good financial adviser.