The Five Most Common Types Of Bank Loans
Whether you are just opening a business, purchasing a new home, paying for Christmas gifts, or just need extra funds to make it through the year, there is a type of loan out there that can serve your needs. Being knowledgeable of the various kinds of loans can be a challenging task.
Loans are typically subdivided into two major categories, secured and unsecured. Unsecured loans do not require any collateral. This is beneficial for the borrower because they experience less stress. The bank, however, is feeling pressure for taking a higher risk. Unsecured loans are usually just borrowed over a short period of time and are for smaller amounts.
On the other hand, secured loans demand collateral that could be used to recover any losses should the borrower fail to repay the loan. Secured loans are usually long term, higher amount options, except in the case of payday loans. For these, the borrowed amounts are smaller and repaid sooner, typically within a month. That is why there are no credit checks with most payday loans.
Below are the most common types of bank loans, and how they work. Hopefully, this will help you decide which type is best for you and your financial needs.
Almost all banks give a type of personal loan which borrowers can use when they need to pay for things such as car repairs or a vacation. Personal loans are often categorized as unsecured with smaller amounts for borrowing. Lending companies usually require a photo ID and proof of income to show that you earn enough money to pay back the loan. The approval of the loan can be decided before even leaving the loan office or website. For the lender to make money off of the transaction, expect the interest rates to be high.
Credit cards are one of, if not the most broadly accepted type of payment today. Credit cards are basically a loan; a constantly revolving loan. The process of applying for a credit card is fast, and most approvals are given within minutes. Credit cards can have varying limits, from a few hundred dollars, up into the thousands. However, credit cards usually have high interest rates and continuously not paying your balances can result in late fees and other penalties.
Most people looking to buy a new home are aware of home loans, more commonly referred to as mortgages. Mortgages are large, long-term loans which are usually categorized as secured and will need some kind of collateral, usually the property itself, to protect the lender from risk. Interest rates of mortgages are usually low but because principal expenses are so high, even low rates can accumulate high sums of interest.
Small Business Loans are usually given by the Small Business Administration or a bank, and can be used to expand a home-based business. Terms of the loans differ in both length and value, and interest rates are often adjustable. Because business loans can range from thousands to millions of dollars, collateral is demanded in order to avail this kind of loan. Approval of this kind of loan takes time, which means obtaining a small business loan can be stressful.
This kind of loan is provided to the best businesses applying for a loan. Usually, businesses will need funds for short term purposes to maximize their transactions and services. A line of credit is set up for a desired amount and the business owner is permitted to use this credit for many of the business’s needs.
A common use for this kind of loan is for receivables. Businesses involved in commerce purchase their goods from other companies. The line of credit is used to pay for these wares to keep the business going. If you operate an eCommerce store out of your garage, then a line of credit can be a good source of funding.
Obtaining a loan can usually make a life-changing difference for a person or business. With multiple options to suit your exact situation, applying for a loan is not a choice to be ignored. Just be sure that you full understand your limitations and know what fits your needs.