Facts You Should Know About Types of Loans
When you set out to borrow, you often come across terms like unsecured loans, revolving loans, adjustable rate loans, etc. While these terms are more or less self-explanatory, it is still useful to be clear on their exact meanings and what they imply before you finalize a loan contract.
Unsecured versus secured loans
As the name implies, a secured loan is one where you offer some kind of collateral against the loan. The agreement is that if you default on the loan, the lender has the right (but not the obligation) to take possession of the asset you have pledged.
In most cases, this asset would be what the lender has financed. For example, when you take a home loan, you offer the home as collateral.
There may also be cases where you may need to offer additional collateral over and above the asset that is being financed. This happens, for example, when the lender is financing close to 100% of an asset that is prone to rapid reduction in market value. In such cases, the lender may insist on your putting up another asset so as to provide a reasonable margin of protection in case of default.
Unsecured loans are those where such collateral arrangements do not exist. These loans are granted based on your credit standing, ability to repay and other factors.
In cases where there's a choice available to the customer to take either a secured or an unsecured loan, the former may be offered at a somewhat lower rate. That is, assuming every other factor remains equal. This is because of the lower risk involved to the lender, who has recourse to a specific asset in case you default. However, this situation is comparatively rare in consumer financing, although it is more common in financing businesses.
Installment versus revolving loans
A revolving loan is one where you have access to a continuous source of credit, up to a pre-determined credit limit. If the limit is say, $10,000, you can borrow any amount up to $10,000. And typically, you can repay all or part of the amount you borrowed at a time of your choosing, within the overall tenor of the loan.
You pay interest only on the amount you borrow for the time you borrow it. Sometimes, banks may charge a commitment fee for making a revolving line of credit available to you. This fee is usually charged on the average unutilized amount of your limit.
You can also re-borrow the amount you have repaid. In effect, you have a loan that's always available to you on demand.
Unlike revolving loans, installment loans have a fixed repayment schedule. In most cases, the full amount of the loan is drawn down (i.e., borrowed) at once and both repayment schedule and amounts are fixed in advance. You do not have the option to re-borrow the amount that has been repaid.
Adjustable rate versus fixed rate loans
A fixed rate loan is one where the interest rate charged is fixed for the entire duration of the loan. The advantage is that you are immune to fluctuations in interest rates and can budget your cash outflows precisely. The disadvantage to you (the borrower) is that should interest rates fall, you lose in terms of opportunity costs. That is, you could have obtained a lower interest rate had you opted for an adjustable rate loan.
In practice, you can always choose to refinance the fixed rate loan at a lower rate if interest rates fall sharply enough to justify it. Bear in mind that your current lender may charge a pre-payment fee if you choose to repay before due date. So the difference in interest rates between your old fixed rate loan and the new loan should be large enough to justify a switch.
An adjustable rate loan is one where the interest charged fluctuates in line with a benchmark rate. This benchmark rate is usually the Prime Rate, which is what the US Treasury charges its prime (or best) borrowers. The advantage of an adjustable rate (or floating rate) loan is that what you are paying is more or less in line with the market. If interest rates decline, so do your costs and vice versa. The disadvantage is that your cash outflows for interest are unpredictable.
As a borrower, if you hold the view that interest rates are going to decline, it is best to opt for an adjustable rate loan. But arriving at the correct view consistently is easier said than done. Predicting interest rates is a game where even professional market participants and institutions frequently go wrong.
If it is important to you to be able to budget for your interest obligations in advance, a fixed rate loan may be the best choice. After all, you can refinance it should the interest rates fall significantly.
Keeping these basic facts in mind should help you make more informed borrowing decisions.
About the Author
Prakash Menon is a financial expert and writer specializing in managing personal debt and providing wealth building solutions. He has written on payday loans, personal debt management and other related topics.
 Google News Updated : Sun, 06 Jul 2008 12:55:34 GMT Obama cites faith as key to change - Boston Globe Boston Globe - Barack Obama called "active faith" an obligation of religious Americans and a chief agent of societal change in a speech yesterday at the national meeting of a black church group. For Republicans, the Senate outlook is bad Analysis: McCain struggles to regain footing Publ.Date : Sun, 06 Jul 2008 06:58:31 GMT Oil Prices Drive Stocks to Bear Market - Washington Post
Washington Post - US stocks fell last week, giving the Dow Jones industrial average a 20 percent bear-market drop from October's all-time high as record oil prices threatened global economic growth. Jobless report, long weekend equal small market gains Market down, but not panicky Publ.Date : Sun, 06 Jul 2008 05:50:10 GMT Google's new privacy link - CNET News
CNET News - Google's decision, noted Thursday in a corporate blog and a public policy blog, was an attempt to quell a controversy over the posting of its privacy policy. Google Replaces Google With Privacy On Its Home Page Google Changes Home Page, Adding Link to Privacy Policy Publ.Date : Sat, 05 Jul 2008 16:59:20 GMT Jesse Helms dies at 86; NC senator opposed equal rights - Detroit Free Press
Detroit Free Press - Conservative icon Jesse Helms, the former Republican senator from North Carolina, died Friday. He was 86. Helms, who served 30 years in the Senate, died of natural causes in Raleigh, NC, an aide said. Video: A Look Back At Jesse Helms Helms never changed on civil rights opposition Publ.Date : Sun, 06 Jul 2008 07:14:24 GMT Taiwan tour operators sceptical about China boom - AFP
AFP - TAIPEI (AFP) - The launch of regular direct flights between China and Taiwan has been hailed as a symbol of progress and a boon to tourism, but industry workers here are not all convinced. Mainland visitors warmly welcomed in Taiwan A Side Competition in Beijing: Island vs. Mainland Publ.Date : Sun, 06 Jul 2008 06:15:38 GMT Google trying to take privacy seriously - ZDNet
ZDNet - This week was a very interesting week as far as Google and privacy goes. First, a burglary (the same on that affected CNET earlier last month) was confirmed to have affected all Google employees hired before December 31, 2005. Court order on YouTube user data fans privacy fears • YouTube Ordered To Release User Data Publ.Date : Sat, 05 Jul 2008 23:49:42 GMT Argentine Lower House Passes Grain Export-Tax Plan (Update3) - Bloomberg
Bloomberg - By Eliana Raszewski July 5 (Bloomberg) -- Argentina's lower house of congress approved the government's plan to increase taxes on exports of grains and oilseeds, risking a resumption of three months of strikes by farmers. Export Tax That Angers Farmers Advances in Argentina Argentina lawmakers approve farm export tax hike Publ.Date : Sat, 05 Jul 2008 22:41:30 GMT Increase Traffic |
PARLOT::Ebooks, Scripts,
Websites, and more... Payday loan companies gives the borrower the amount of the... Read More The average person some time in their adult lives will... Read More Here are 8 things to consider, when evaluating lenders online:Website... Read More Here is a useful guide to secured loans. A secured... Read More If you find yourself looking for a loan, you'll likely... Read More If you're in the process of trying to find home... Read More A second mortgage is a loan that is secured by... Read More You might find yourself wondering about the origins of online... Read More In the arena of loan borrowing, there is hardly an... Read More When borrowing money it is usually because we lack the... Read More Here is a useful guide to getting a bad credit... Read More You were on your regular walk with your wife, and... Read More For those individuals who are looking for fast and inexpensive... Read More I remember years ago growing up when you needed some... Read More Emergency - the word is written everywhere in red and... Read More Payday loans are loans of a small amount, taken for... Read More So, you want to get a loan?Here are some simple... Read More Credit Unions have long been known as the place to... Read More Many people are confused by the different types of loans... Read More Secured homeowner loans come in a variety of different types... Read More A $500 payday loan can be a real life saver... Read More If your home business is starting to overflow from the... Read More Every year, misinformed homebuyers, often first-time purchasers or seniors, become... Read More Homeowner loans UK are a very versatile type of personal... Read More Outlined below are some of the reasons for choosing a... Read More
Adsense
websites
Payday Loans: How They Really Work!
What?s All the Hype about Omni Military Loans?
8 Point Checklist: Evaluating Online Vendors
Guide to Secured Loans
Shopping for a Secured Personal Loan
A Guide to Finding Home Owner Loans
Second Mortgage Loans
A Look at the Origins of Online Lending
Bad Credit Personal Loans ? Pertinent Pedestal for a Financial Resumption
Loans - Good or Bad Debt?
A Consumers Guide to Getting a Bad Credit Loan
Bridging the Gap ? through Bridging Loans
A Guide to Finding Inexpensive Direct Loans
Payday Loans And Pawnshops: Comparing Two Popular Ways Of Getting Cash Quickly
Payday Loans - Bridging The Void Between Paychecks
The Average Profile of Customers Opting for a Payday Loan Cash Advance
Simple Tips On Getting Your Loan
Searching for the Perfect Car Loan
Loans Guide
A Beginners Look at Secured Homeowner Loans
A $500 Payday Loan Can Help In an Emergency
Making Your Business Happen with a Commercial Lender
Top 10 Ways to Avoid Loan Fraud
Useful Information About Homeowner Loans UK
Why Choose a Homeowner Loan?
Affordable and Reliable Web Hosting Starting at $4.49/Month
Bridge Loans: Everything You Wanted To Know
As the name implies, bridge loans fulfill a vital need... Read More
Finding the Loan UK that Meets Your Needs
For those in the market for a loan UK ,... Read More
Understanding Secured Loans
A secured loan is any loan that is secured on... Read More
Short Term Payday Loans - Use One Online To Get Cash Quick
Short term payday loans are now available online. After filling... Read More
Money With The Click of a Mouse
Online payday loans seem to be popping up everywhere. A... Read More
Cash Loans for Unemployed ? for an Instantaneous Response to Needs of the Unemployed
Unemployment is generally supplemented with several other vices like poverty... Read More
Top 10 Ways to Avoid Loan Fraud
Every year, misinformed homebuyers, often first-time purchasers or seniors, become... Read More
Simple Tips On Getting Your Loan
So, you want to get a loan?Here are some simple... Read More
Secured Business Loans ? Equipping Your Business Blueprint With Concrete Groundwork
Somebody once said, 'Business is not financial science; it's about... Read More
Bank Auto Loans ? Best Loans for Stretch Commuters?
People have to work to survive. The desire to maintain... Read More
Christmas Loans ? A Gift on the Occasion of Christmas
It is still a few weeks to Christmas and every... Read More
To Find The Right Loan You Must First Find The Right Lender
We have found internet shoppers to be the savviest in... Read More
Why Choose a Bad Credit Personal Loan?
Listed below are some of the reasons for choosing a... Read More
Refinance Your Car Loan - 3 Tips For Refinancing Your Auto Loan Online
Refinancing your car loan is an ideal way to lower... Read More
Fast Cash Personal Loan - No Credit Check and Very Quick
You can get a payday advance with cheap rates and... Read More
Instant Car Loan - Get an Approval Online Quick
Your car loan is now less than an hour away... Read More
Understanding Personal Loans, Cash Advances and Payday Loans
Have you ever been short on cash? Has an unforeseen... Read More
Guide to Secured Personal Loans
Here is a useful guide to secured personal loans. A... Read More
Holiday Loans Can Expand The Horizon Of What You See
Why do kids get all the breaks? Winter-weary adults, fed... Read More
Become A Smarter Borrower
With a nation that has in the region of a... Read More
Cash Advance Payday Loans: A First Time Users Guide
If you considering using a Cash Advance Payday Loan service... Read More
Why Choose a Bridging Loan?
Listed below are some of the reasons for choosing a... Read More
Guide to Secured Loans
Here is a useful guide to secured loans. A secured... Read More
Military Payday Loans
What is a payday loan? This is a small short-term... Read More
Instant Cash Advance Loans - Take Advantage of The Convenience of The Payday Loans Available Online
Cash advance loans not only provide you with instant cash,... Read More
Loan |