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Understanding the Different Types of Loans


Before getting into the nitty gritties, it’s important to recap on what loan is. In a nutshell, it’s a sum of money borrowed and is expected to be paid back with interest. With that out of the way, there are various reasons why people borrow money. It may be to expand on that business idea you’ve had for years, buy that car you’re dreamt about for ages, or to further your studies. Whatever your reasons are, you’ll first need to understand the different types of loans before committing yourself into any long term commitment.

Today, if you borrow money, depending on your various needs, you’ll need to pay it back with the agreed interest. But then again, you’ll need to consider what’s best for you, with your needs into perspective. This is because not all loans will be suitable for your specific needs. In addition to this, loans are not created equal and depending on the type of loan you borrow, it may come with different interest rates, payment schedules, and so forth. To help you out, this article is all about understanding the different types of loans.


1. Secured Loans

Today, secured loans are becoming increasingly popular, especially because most people are surviving with bad credit. Secured loans have become the getaway solution for individuals who have poor credit and are looking to increase their assets and get their dreams realized.

Your credit score aside, a car loan is an example of a (self) secured loan in that the car itself acts as collateral in the event that you’re unable to pay back the borrowed money. If you’re looking for a loan to finance a car purchase, the folks at ­­­­­­­moneyexpert.com say that you can get car financing without having to pay a dime upfront. This is called no-deposit car finance, which in some cases, you’ll only need to pay a small reservation fee, usually not until after the first 30 days of the deal when your first payment is due.

One thing to also note is that most secured loans attract low-interest rates and this might come as an added plus to people who don’t mind using their assets as securities for the loan. However, there’s a caveat attached to secured loans. Individuals who sign into secured loans run the risk of losing their assets in case they default on the loan payments. But considering that the advantages outweigh the disadvantages, these are the ideal loans for those with poor credit or those who want to make big purchases fast. The risk is always minimal if you’re sure you’ll pay back the money you borrowed.


2. Unsecured Loans

As the name suggests, these are loans that will not require that you put any collateral against the loan. When it comes to unsecured loans, your creditworthiness is your biggest ally and strength. Failure to repay your loan would be risking your credit. This means that any other bank will be aware of your defaulting or your late loan payments, making it harder to access unsecured loan facilities from other lending institutions in the future. Unlike secured loans, unsecured loans attract higher interest rates as they are not protected by any collateral. Nevertheless, unsecured loans may offer flexible repayment plans. They are often also more accessible, require minimal documentation, and have fast fund disbursements.


3. Payday Loans

These are short term loans, meaning that they have shorter terms or repayment durations compared to secured and unsecured loans. In most places, Payday loan application processes are governed and monitored by the state, unlike in secured and unsecured loans which are largely monitored by the banks. This is the ideal loan when you have an emergency that requires immediate funds. They are also a great solution to limited income earners and individuals who have little to no savings. Like secured loans, you may be required to show or provide collateral when applying for a short term payday loan. However, this doesn’t mean that payday loans are cheap. Actually, these are the most expensive loans a person can borrow.


4. Home Equity Loans

Home equity loans are a type of loan where your home is used as collateral. These loans, like secured loans, attract a lower interest rate and are easily approved because you have something else to secure your loan. But individuals taking a home equity loan should be extra cautious on lateness on loan repayment or ultimately defaulting on the loan. There’s always the risk of losing your property to foreclosure.


5. Credit Cards

Today more than ever, credit cards have become the most common consumer loans taken by individuals. It may be due to their convenience or flexible repayment plans but one thing to note is that a credit card will allow you access to things you would otherwise dream about without the cash. Credit card loans are an unsecured type of loan where the amount you spend from your credit card is debited to your bank account. They can be expensive to repay in terms of interests. Either way, they may be your only option to accessing some of the things you’ve been dreaming for. They also add convenience when it comes to shopping without cash or money in your debit card.


Nothing beats the idea that you can still achieve your dreams with or with no money. Today, loans are increasingly becoming more accessible, especially since the advent of online loan applications. With an internet connection, a smartphone, and a good credit history, your dreams might as well become fulfilled. However, before applying for any type of loan, it’s important that you find the need to know what the loan repayment schedule requires or what the loan rules are about. These are aspects that may help save you a lot of trouble down the line.