Loans
Types of Loans
There are many types of loans available for various purposes. Most financial institutions offer auto, personal, home and first mortgage loans. These loans are outlined below:
Auto Loans
Auto loans serve the purpose of helping you finance a vehicle purchase. The rate and term of the loan is mostly determined by your credit score and the age and value of the vehicle.
Auto loans are secured by the purchased vehicle. This means that the financial institution will only release the Title of the vehicle to you when you have paid your loan in full.
A note about repossession:
If you do not repay your loan, your vehicle may be repossessed. Obviously, this will reflect poorly on your credit score. What you may not know is that you will still be responsible for the amount of debt that the financial institution cannot recover by the sale of your vehicle.
Personal Loans
Personal loans may be used for any purpose and are generally unsecured which in many cases will lead to a higher interest rate.
Home Equity Loans
Home Equity loans may be used for any purpose and are secured by your home. The limit on the loan is determined by the equity that you have in your home. These loans are not used to finance the purchase of a home.
First Mortgages
First Mortgages are used to finance the purchase of a home. The loan is secured by the home. Most financial institutions have varying requirements about money down and terms.
Interest Rates
In the savings section we talked about earning interest – here we’re going to talk about paying interest.
Each time you take a loan, you must re-pay the full amount that you borrowed (principal) and also pay interest to that financial institution.
Interest rates vary based on:
- The type of loan
- The length of loan
- Your credit score
Fixed vs. Variable Rates
There are 2 types of loans available as far as interest rate is concerned – fixed-rate loans and variable-rate loans.
Fixed-rate loans are guaranteed to stay at the same APR for the entire term of the loan. This is generally the kind of loan that you want to get. Some loans that fall into this category are usually car loans, home equity loans and personal loans.
Variable-rate loans usually have a rate that is tied to an index (ex: Wall Street Prime) and they are eligible for change at any time during the term of your loan. Loans in this category are often called Lines of Credit (which includes credit cards).
Whenever possible you want to make sure to get a fixed-rate. You can even find some credit cards out there that are fixed rate.
Early Pay-Off
If it fits your budget, you may want to make larger loan payments than required. Paying your principal balance down quickly will cause less interest to accrue.
Generally, most loans do not have an early pay-off penalty. This is rare but most commonly seen in mortgages. What this means is if you pay off your loan in a certain time frame, you will owe the creditor additional money.
It is important to read all of the paperwork and documents before you sign any loan agreement.
Words of Caution
In the world of loans there are a few things that you need to know. There are lenders out there who don’t always have your best interest in mind.
Pay Day Lending
Pay Day lending is a type of institution that will give you a loan when you are in desperate need of cash. The problem with this is that they will generally charge you more than 20% interest.
Furthermore, they may ask you for the title to your car as collateral. Can you really afford to lose your car over a $200 loan?
Credit Counseling/Repair Services
If you are having trouble with your debts, try to stay away from credit counseling services. Instead, work out a payment plan directly with your creditor.
Remember, credit counseling services are businesses – in it to make money. Using these services could end up costing you more money, and they don’t always pay off your bills like they say they will.
Most importantly, it will show on your credit report that you are in credit counseling. The only time to consider credit counseling is as a last resort to avoid filing for personal bankruptcy.
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