Knowing Types of Consumer Loans

There are numerous reasons for borrowing money through consumer loans, for example, rebuilding your kitchen, purchasing another car, paying for college or making a noteworthy purchase. Whatever your reason is, it really is good to acclimate yourself with the types of consumer loans available to you and the kinds of terms you can anticipate.

Open-end loan and closed-end loan

The two basic categories in consumer loans are open-end and closed-end loan. The open-end loan can be used repeatedly for purchases and will be paid monthly. Paying the loan in full amount is not required, though it will incur interest if it’s not paid in full amount.

The most common example of open-end loan is the credit cards. Credit cards are mostly used for daily expenses, such as clothes, food, small home repairs, shopping, etc. Interests are applied if the monthly balance is not fully paid. The rates on credit cards vary around 15 to 30 percent depending on payment history or credit score.

Closed-end loan, meanwhile, is mostly used for a particular purpose for a specific timeframe. It’s also commonly called as installment loans since debtors must settle the loan in a regular payment schedule with an included interest charges until the principal amount is paid off.

This type of loan as broader kinds of example, such as mortgages, car loans, personal loan, student loan, etc. The interest rate for closed-end loans varies by lender and is really affected by consumer credit score.

The closed-end loan also has two different method, secured loan and unsecured loan. Secured loan means you are backed by collateral such as your house, car, or other assets you own. Lenders may seize the collateral as a compensation if the consumer fails to repay the loan.

Meanwhile, the unsecured loan are not backed by any collateral, yet it really affects the consumer’s credit score in case of defaults.

Here are some comparisons between secured and unsecured loans:

	Secured loans	Unsecured loans
Characteristics	-          Backed by collateral -          Requires more documents and longer time to apply -          Collateral needs to be assessed and verified	-          No collateral required -          Affect more credit score -          Faster approval
Interest rate	Lower	Slightly higher
Types of loans	-          Mortgages -          Car loans -          Business loans	-          Personal loans -          Student loans

Whichever loan you decide to borrow money, whether it is to pay bills or to purchase a house, make sure you fully understand the terms and agreement of the loan. Know what type of loan you’re receiving and get to know yourself with the repayment terms.

The most important thing in taking loans is knowing your obligation: to repay the loan according to the agreement.