So, what are loans? When do you need them? Why do you need them? Well, according to Wikipedia, a loan is defined as “a debt provided by one entity (organization or individual) to another entity at an interest rate, and evidenced by a note which specifies, among other things, the principal amount, interest rate and date of repayment”.
To put it simply, the person who needs money – the borrower – receives the amount needed from the lender. The borrower is then obligated to pay back that equal amount of money to the lender in the agreed amount of time. The lender benefits from this transaction by charging an interest rate on that borrowed money. In every legal loan, each of these agreements and obligations is enforced by a contract.
Here are basic types of loans you should know about:
1. Open-ended loans
These are loans that involve a revolving line of credit issued by a lender or more often, a financial institution. This means that you can borrow over and over again – but with terms and conditions of course. For example, credit card loans or a home equity line of credit. An open-ended loan allows you a certain amount of money known as your credit limit. You don’t have to use up the entire limit; you access the line of credit as needed. Once you repay that amount borrowed, you then have access to that line of credit again. The process repeats itself.
2. Closed-ended loans
These are one-time loans in which the money you borrow once cannot be borrowed again once the repayment has been made. There is no credit limit involved but rather a fixed amount is agreed upon at the start. As you start to pay back, your debt decreases. And if you want to borrow more money, you will have to apply for another loan. Examples of closed-ended loans are mortgage loans and student loans.
3. Payday loans
These are the loans that save you when your bad credit score causes banks or other financial institutions to reject your loan application. But hold up, even though payday loans are solutions to your financial crises, never forget to weigh the pros and cons. The upside about these loans is that obtaining approval within 24 hours for these loans is not a difficult task – and for almost any amount required. However, the downside is that these payday loans, more often that not, come with high interest rates.
Before taking out any loan, remember to calculate your gain against your losses and whatever you do, stay away from advance-fee loans. These loans are, in fact, not loans. An initial fee is charged upfront and once paid, the lender will miraculously disappear without ever sending the money to you.