A Guide To The Different Kinds Of Loans Available

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Loans

Loans are offered by banks, building societies, and sales organizations. These organizations earn money by charging a small percentage of interest on their loans. Here is a guide to the most common kinds of loans. 

Home Equity Loan 

A home equity loan is a borrowing arrangement in which a purchaser remortgages their home and uses the value of their house as collateral. Organizations like the Bank of Labor offer home equity loans to people with good credit scores.

These loans are often used as a way of paying for major home improvements or investments in property. Many people use home equity loans to increase the value of their property – enabling future home equity loans to be more favorable. 

Payday Loan

Payday loans are short-term, high-interest payments designed to enable people to purchase essential items before their pay comes in. These loans should not be taken out lightly.

Payday loans have high-interest rates and can leave a person significantly indebted. Seek help from a charity or financial advisor before taking on one of these loans. In recent years, governments have cracked down on these so-called ‘legal loan sharks’ and imposed strict rules about the amount of interest that can be charged. 

Auto Loan

An auto loan is a kind of finance plan designed specifically to enable the purchase of an expensive vehicle. Many vehicle dealerships offer this kind of loan as a standard feature of their business practice. Third-party auto loans can also be taken out – with customers borrowing money from a bank under the condition that the money is spent on a pre-arranged vehicle.

Auto loans are almost as old as the mass-market car industry as a whole. The General Motors Acceptance Corporation was formed in 1919 for the specific purpose of loaning money to people so that they could afford GM cars. The 1920s boom in auto loans is considered to be part of the reason for the mass poverty experienced following the 1929 stock market crash: there was simply too much debt carried by ordinary people who had purchased cars. Auto loans have played a role in several recessions, according to the US Federal Reserve. 

Mortgage Loan

Mortgages are an incredibly popular kind of loan. The vast majority of people looking to purchase a home do not have the funds necessary to purchase their home outright. A mortgage is a loan agreement in which a bank fronts the money for the purchase of a home and takes interest fees from consumers as a reward. Most mortgages can only be taken out if the loanee is able to put down a ten percent deposit.

The loaning bank technically owns the percentage of the home that they have paid for until the loan has been paid back. Mortgages can take many years to pay back, but they are the only viable way for the vast majority of people to afford a home. Mortgage deposit rates have steadily climbed, which has prevented many people from taking the plunge in the first place. 

Credit Builder Loan

In order to take out a loan or purchase goods on a finance plan, it is necessary to have a good credit score. Credit scores can unfortunately only be acquired through the taking out of some kind of credit line. Credit builder loans are small loans designed to boost a customer’s credit score.

It might seem pretty silly to have to take out a loan so that you can get a more significant one, but this is one of the only ways of artificially boosting a credit score. If a credit builder loan is not paid back in full and on time, it can negatively impact a person’s score and hinder their ability to receive loans and product finance in the future. 

Debt Consolidation Loan

Debt consolidation loans are designed to be taken out for people that need to pay their debts before they are able to earn enough money to do so. Most debt consolidation loans have very long payback times, with the idea being that people can ‘buy time’ on their debt. Debt consolidation loans should never be taken out without seeking financial advice first. At the end of the day, a debt consolidation loan is another form of debt creation.

Bad faith lenders have historically offered people debt consolidation loans without offering sound financial advice beforehand. This can lead to a spiral of debts – all feeding into one another. Good faith lenders will run applicants for this kind of loan through their options and soundly inform them of the feasibility of paying back their debt consolidation payments. Some government organizations and charities offer debt consolidation loans at 0 percent interest.