Types of Loans and When to Use Them
28 February, 2016
There are various ways credit is extended to someone in the form of a loan, and there are various types of loans, however, so simplify matters, loans can be divided into one of two categories, secured or unsecured.
A secured loan is a loan that has a tangible, physical item that the loan was granted for, such as a house or car. Unsecured loans are loans or lines of credit, that there is no collateral or physical object that the loan was used to purchase.
Secured loans have something that can be repossessed or taken back if the borrower fails to make the agreed payments. Unsecured accounts do not have anything to repossess.
Here are some types of loans and when they may be used:
Mortgage: A secured loan, which is usually used to purchase a house or property. Should the borrower not make payments, the property can be foreclosed on or repossessed.
Car or Auto Loan: Also a secured loan, which is usually secured against the vehicle. Should the borrower not make payments, the car can be repossessed.
Other Secured Loans: These can be loans for a boat, camper van or RV. In a business setting the loan may be for restaurant equipment, or other equipment needed by the business to operate.
Personal Loans: These can be secured or unsecured. They are usually a loan granted to the borrower with a specific purpose, however, the loan may just be an unsecured loan for whatever the borrower wishes to use the funds for.
Overdraft or Line of Credit: These are unsecured loans that are usually attached to a person's bank account. Should the account holder need some extra money, the overdraft is there as a loan to be used. It can be used to make a purchase, however, there may be less expensive and lower interest rate loans that may serve the same purpose.
Credit Cards: Credit cards are essentially unsecured lines of credit that are revolving, which mean s you have a line of credit to use and as you pay the balance off your line of credit resumes. Credit cards are good for purchases where you may have the funds to afford an item, but don't want to carry around a large sum of cash.
Guarantor Loans: These loans can be secured or unsecured, and for a variety of purposes. The borrower has a person they know, such as a family member or friend, guarantee the loan. This means if the borrower doesn't make the payments, the guarantor will pay them and that is why they are called guarantor loans.
While not an inclusive list of the various types of loans, these are the main ones. Loan industry and availability of different kinds of loans is something that is well organized and mature in UK as compared to several other developed countries. However, the best policy always should be to keep your expenses in the limits so you never reach a stage where you would want to get involved in this vicious circle of loans.