A Beginner’s Guide To Different Types Of Loans

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There are some situations when people may not have money to buy or do some things in their lives. Several options are available through which you can borrow money and use it to fulfill your needs. If you need a small amount of money you can borrow it from friends and family. But if you require a huge amount of money you may not be able to get it from the mentioned sources. That is when you need financial aid. Loans are a way of getting money from institutions for which you pay back the amount borrowed as per your schedule.

Sources To Get The Required Money

There are different types of loan options available in the market that can help you get the required money. You can borrow these financial products from various sources such as banks, traditional lenders, alternative lenders, and more. 

Banks & Credit Unions – If you are planning to borrow money from banks, you should have a good credit record. The interest rate is lower when you borrow from banks. Banks also offer refinancing options that let you refinance your loan with a new one with a better interest rate and terms. You can borrow money from traditional lenders when the amount of money you require is not large. If your credit history is not good then it means that the chances of getting a loan are very low or impossible without filing bankruptcy.

Alternative Lenders – These lenders offer similar services as the traditional lenders but they are based on different types of financial instruments such as credit cards, installment loans, auto loans, home equity loans, and so on. They may charge higher interest rates and add extra fees for late-payments or failure to make payments. They also require people to submit collateral and also provide pre-approval for customers with bad credit records.

Traditional lenders – These are small businesses, angel investors, and venture capitalists. They offer loans at lower interest rates than alternative lenders but higher than banks. They offer loans to people with good credit scores and steady income sources. Their terms and conditions are strict, so they allow borrowers to borrow money only in case of urgent need. 

Types of Loans 

Based on Security Offered

  • Secured loan – In this type of loan, the borrower submits his/her property or assets as collateral. The lender agrees to buy the asset at a pre-agreed price and only after receiving full payment of the loan.
  • Unsecured loan – In this type of loan, the borrower does not have to provide any collateral and therefore does not require documentation or proof that he owns an asset with a value greater than the amount borrowed. But this type of lender is more expensive and reliable because they realize their profits by means of interest.

Based On the Purpose

  1. Education Loan – This type of loan is made available to the students who already possess a degree or an educational qualification and require more funds for their further education. There are two types of student loans – federal and private. Federal loans are available from government sources and private loans are granted to students from financial institutes.
  2. Personal Loan – This type of loan is generally applied when a borrower requires money for their personal expenses where they do not wish to submit any collateral as security for the loan. The amount of such a loan should not be large enough to purchase real estate or make an investment in the business.
  3. Vehicle title loan – This is one of the most popular types of loans where the borrower gets money by using the title of the vehicle as collateral. A car title loan is easy to obtain and also has a competitive interest rate. This title loan option is best for people who have a bad credit score or no permanent income source. This financial product is beneficial as you do not have to pay penalties for paying the title loan amount earlier than the due date. You need to make sure that you get this title loans from a reliable lending institution such as Same Day Cash Loan to get a title loan without any hassle. 
  4. Business Loan – If you are looking to start a business or own your own shop, you may require getting money from financial institutes as it will create financial stability in your life. The amount of money a business owner may require varies according to the kind of business he/she is planning to start.
  5. Home Loan – If you want to buy a house, you may require getting money for this purpose. The amount of loan depends on the size and location of your home.

  6. Home improvement loans – These are loans that are provided to borrowers who require funds for their real estate as it helps them make substantial improvements in their homes. The loan amount depends on the expenses required and the property value acquired after they get it approved.

Based On Mortgaged Assets

  1. Loan against gold – It is one of the safest and secure types of loans. The borrower can take out a loan against their gold assets and receive an amount based on the value of their gold jewelry or any other bullion in exchange.
  2. Loan against assets – People can use their property, insurance policies, mutual funds, shares, bank accounts, FD certificates, etc as mortgage and get the needed money. You’ll get the amount up to the equity value of the asset offered. Borrowers need to repay the loan regularly along with interest. This type of loan is also known as secured property mortgage, collateralized mortgage, or asset-based mortgage.

Factors Considered By Lenders To Approve Your Loan Application

  1. Credit score – When you apply for a loan, a lender will check your credit score based on your credit report. The higher the score, the lower the interest rate that you will have to pay. The credit score is calculated based on the credit history and other information in your credit report. Lenders also check the number of your debts and how much you have available to repay them.
  2. Income proof – The lender will check your income sources to determine how you will be able to make monthly payments. This includes details of employment, income from another source, income from property, self-employment, etc. The lender will consider high-risk factors such as bad debts, bankruptcy, etc when deciding whether they should approve or deny your loan application.
  3. Repayment history – Your repayment history is another important factor considered by lenders for approving a loan application. It includes details such as repaying a previous loan on time and the payment status of any credit card.

  4. Debt-to-income ratio – Your debt-to-income ratio is one of the major factors that will determine if you qualify for a loan. Your debts are divided by your income, and the lender compares this result with the market’s average. If your ratio is lower than the market’s average, then you are less likely to have a default in the loan payment.
  5. Collateral – Collateral is one of the most common methods for securing a loan. It works in the same way as bail-in which you pledge your property as security for the loan and then gets it back after paying off the loan. The lender requires a certain value of collateral loan. The term of such a loan is usually long to offset any possible losses from any decline in property values or if you fail to pay back the money on time.

Now you must get a clear understanding of the loan and their types. It’s better to complete your loan process from a reputed non-bank lender. With them, you can easily avail yourself of the cash within a few minutes and 100% online approval with no faxing or paperwork. 

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