What Type of Loans Available? Which Meet Your Need?

by Dori Tery on April 26, 2013

Single Payment Versus Installment Loans

Consumer loans can be either single-payment loans or installment loans. A single payment or balloon loan is a loan that is paid back in a single lump-sum payment at maturity, or the due date of the loan, which is usually specified in the loan contract. At that date you pay back the amount you borrowed plus all interest charges. Single payment loans generally have a relatively short maturity of less than one year. Needless to say, paying off a loan of this kind is generally quite difficult if you do not have access to a large amount of money when it matures. As a result, they are generally used as bridge or interim loans to provide short-term funding until longer term or additional financing is found. A bridge loan might be used I financing the building a house, with the mortgage loan being used to pay off the bridge loan and provide more permanent funding.

An installment loan calls for repayment of both interest and principal at regular intervals, with the payment levels set so that the loan expires at a preset date. The amount of the monthly payment going toward interest starts off large and steadily decreases, while the amount going toward the principal starts off small and steadily increases. In effect, as you pay off more the loan each month, your interest expenses decline, and your principal payment increases. This process is commonly referred to as loan amortization. Installment loans are very common and are used to finance cars, appliances and other bit ticket items, and they are on the rise!

Secured versus Unsecure Loans

Consumer loans are either secured or unsecured. A secured loan is guaranteed by a specific asset. If you cannot meet the loan payments, that asset cab be sized and sold to cover the amount due. Many times the asset purchased with the funds from the loan is used for security. For example, if you borrow money to buy a car, that car is generally used as collateral for the loan. If you do not make your car payment, your car may be repossessed.

Repossessed collateral, though, may or may not cover what you owe. That is, after the collateral is repossessed, you could still owe money. For example, if you owed $40,000 on your house, but the bank could only get $35,000 for it, you could still owe another $5,000. That means you would have your home repossessed and still owe money on it! Other assets commonly used as security for a loan are certificates of deposit (CDs), stocks, jewellery, land, and bank accounts. Securities reduce lender risk, so lenders charge a lower rate on a secured loan than they would on a comparable unsecured loan.

An unsecured loan requires no collateral. In general, larger unsecured loans are given only to borrowers with excellent credit histories, because the only security the lender has is the individual’s promise to pay. The big disadvantage of unsecured loans is that they are quite expensive. Read more of Mortgage Lenders of America reviews & ratings.

type of loans available

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