The powers that be keep telling us that we are coming out of the recession. Most people wish they would tell this to their bank accounts. Many are still unemployed and the numbers of homeless and hungry continue to grow. There doesn’t appear to an end in sight, as the world tries to recover from the financial crisis that emerged in 2007. No matter what the government officials tell the public, many people are still struggling. There are an alarming number who just do not have the funds to cover mortgage, rent, utilities, medical and food costs. The paycheck, when there is one, is gone before all the bills are paid.
Loans have become the solution for some to get through the difficult times, but how do people choose the right loan for their situation? How do they know what will cover the gap in funds and not get them into more trouble? What types of loans are available to consumers?
Open-Ended Versus Closed-Ended Loans
Two popular loan types are open versus closed-ended loans. The open-ended loans are ones that you can borrow over and over based on your need. The most common types of open-ended loan are credit cards and lines of credit through a financial institution. These credit opportunities are designed around your credit worthiness and reward you when you pay on time, or pay off your balance in full. Each time you make a purchase the amount of credit available decreases. For example if you have a credit limit of $300 on your credit card and you make a purchase of $100, then you only have $200 left to spend on your next purchase. The reverse is also true as when you pay off your purchases, your available credit increases.
The close-ended loan is the type of loan you borrow for a specific amount and pay down over time without a continuing line of credit. This is common in mortgage, auto and student loans. These loans are usually long-term loans with set interest rates and payments. For example, you purchase your home at $100,000 and agree to repay it at 5% interest rate for 30 years. You do not receive a line of credit, but you slowly pay off the cost and principal of the loan until you own your home outright.
Secured Versus Unsecured Loan
Secured loans are guaranteed loans that have backing that assures the loan will be repaid. This backing is collateral that will pay off the loan, in the event that the loan defaults. The lender can then use the collateral to pay off your debt. The collateral can be your home, cars and other luxury items. In order to use collateral, items will often be appraised to evaluate their cost. The insurance of collateral supports your loans and helps to keep fees and interest rates low.
Unsecured loans are the opposite of this; in essence they do not have an asset to secure the repayment. Without the function of collateral, you may pay more for the loan because the lender will use higher interest rates and loan fees. If you fail to pay back your debt, then you may be turned over to collections or sued for the balance of the loan, collection fees and any court fees.
Payday And Advance Fee Loans
Not all loans are created equal. In the landscape of lending, payday and advance-fee loans are the most dangerous yet most tempting. These two types of loans are short term lending that charge exorbitant interest rates. Payday loans are quick same day loans that use your next paycheck to guarantee the loan. If there is any of your check left, they refund you the difference.
The advance-fee loans are not really loans. These are actually scams to get money from you before you ‘borrow’ money. The company asks you to send money before they lend to you and then in most cases they never lend to you. These are popular online and these lenders are famous for disappearing after taking your money. The rule of thumb is you should not have to pay ahead of time before borrowing money. Even when banks charge loan fees, they take the fees out of your loan, instead of requiring you to pay beforehand.
The world of finance and lending can be difficult to navigate. Take the time out to research, ask questions and read the fine print. Before putting yourself further in debt, try budgeting and seeking sound financial advice.
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