If you have ever considered getting a loan to pay off a large bill or you want credit to pay in advance for items, you will have probably looked at plenty of different options. But how can you choose the right type of loan to suit you? First, you will need to look at the types available to you.
What Loan Is Best For Me?
There are two main categories when it comes to consumer credit: open-end and closed-end. Open-end credit can also be known as revolving credit- and this describes a credit where it can be repeatedly used month on month to buy items, as long as it is paid back on time. The most commonly used type of open-end credit is the use of credit cards. Phone contracts can also be a version of this if you are not tied into a specific number of months. Home equity loans and loans for home owners can also be examples of this.
Closed-end credit is a form of credit where you are tied into a contract for a specific amount of time and the money is used for a specific purpose. These loans will involve monthly payments along with payment of interest over a period of time until the debt is paid off. The interest rate you will have to pay will largely depend on both your credit rating and your borrower. Examples of closed-end credit could be mortgages, payday loans and car loans.
There are many different types of loans available to people which will either be open-end or fit a specific purpose. The type of loan you go for will determine the interest rate, time period and other things.
Student loans are ones which are offered to students to help them pay off either college or university fees. They are usually offered year by year- so you will need to reapply for them every year. They come with low-interest rates and low repayment terms. You will only have to pay them back after earning a specific amount of income.
Mortgages are a loan which banks will provide you with in order to purchase a home. Most people cannot afford to pay for a home upfront, so instead they will take out a mortgage for a term of 20-40 years. The interest rates will depend on the mortgage provider and your repayments will depend on the value of the home you buy.
Personal loans are a loan which you will use for your own purposes and do not have a specific purpose, so you can really use them for whatever you need. They will depend on your credit history but allow you to borrow money whenever you want and pay it back in instalments.
Payday loans tend to be short-term and help people who are struggling to last until payday before they need to splash out for a repair to their home or car. They are helpful for the short term but the interest rates are staggeringly high so should not be taken without serious consideration after exploring all options.
Before taking out any kind of credit you must make sure that you can afford to repay it over the specified term, if you can’t then you need to look at your income/outgoings before going any further.