Learn of the different types of bank loans offered to customers today including commercial, student, debt consolidation, payday and more.
Whether through misfortune or just a need for money to finance a project, it’s possible to get into a situation where you need to borrow money. There are many places you can borrow money but the most common is the bank. So, what is a bank loan? Bank loans are money borrowed from commercial lenders. These types of loans will have a predetermined time duration together with interest, either fixed of adjustable.
The Different Types of Bank Loans
There are several different types of loans. The most common are car loans (used and new), credit cards, home loans (fixed & adjustable rate), business loans, student loans, and personal loans. These loans can be either secured or unsecured and even installment loans. Some of the different bank loans available to customers today are as follows:
- Bridging loans
- Commercial loans
- Guarantor loans
- Home equity loans
- Home improvement loans
- Payday loans
- Small business loans
- Student loans
Secured Loans – Advantages and Disadvantages
Learn what are secured loans and how they benefit the bank and its customers.
This type of loan is protected by asset or a collateral. The items that is purchased from the proceeds of a loan e.g. a house or a car loan can be used as the collateral. Interest rates for secured loans are usually lower. If you fail to pay the loan as agreed, the lender will take possession of the item that was used as collateral. These can long term or short term loans.
A bank loan made on collateral, such as auto loans and home mortgage, has loan security attached to this it. Therefore, if the customers is unable to pay his loan, the bank repossess the vehicle to protect its interest. This vehicle is sold to recover the outstanding balance of this loan.
The advantages of secured loans:
The key advantages of secured bank loans include:
- They are easier to obtain. These loans are always cheaper for anyone who has a decent credit score. This is because the bank is sure that it can recover the money that was given out in case you fail to pay as expected. It is still possible to get a secured loan when you have a bad credit history.
- You can borrow over a longer period. The term of such loans usually ranges from 5 to 20 years. Unsecured loans terms range from 1 to 7 years. Longer repayment periods help lenders to offset the hefty set up costs. However, as a borrower, you should keep in mind the fact that borrowing for longer increases the total amount of interest paid significantly.
- Big borrowing is possible: It is possible to borrow more when you take an unsecured amount rather than an unsecured amount.
The disadvantages of secure loans:
- You could lose your home. If you do not make your loan repayments on time, you may end up losing your home or any other asset that was used as collateral. Many people have lost their assets after failing to repay the loans they took from banks and other financial institutions.
- They have variable interest rates. Secured bank loans have a variable interest rates. This can mean that the interest rate that will be charged in future may be higher than the interest rates charged today.
Unsecured Loans – Definition, Risk, Benefits & Disadvantages
Learn what are unsecured loans and of their risks to banks and about the benefits and disadvantages to the borrower.
What are unsecured loans?
This type of loan is a zero collateral one that is approved only on a borrower’s credit worthiness. Security is not needed to get such a loan. The borrower must have high credit ratings to qualify. These are offered by most banks. If your credit history is not perfect, there is a high chance that no lender will be willing to give you such a loan.
The risks to the lender
Because such unsecured credit is not backed by any type of property, they are a bigger risk to lenders. That is why they usually have a higher interest rate when compared to secured loans. The lender does not have anything to hold on to in case the borrower fails to repay the agreed loan amounts.
The benefits to borrowers
These loans are good for people who do not have property that can be used as collateral. It is also ideal when you don’t have adequate equity in your home to be approved for home owner’s equity loan. It is much easier to obtain an unsecured amount than a secured amount if you meet the income and credit requirements. The amount of money that you can be given when you apply for an this type of credit depends on the size of your business and your credit rating.
Another key advantage is the fact that your property will not be seized if you default on repayment. The lender can only seize your property when he has obtained a court order. In addition, if you file for bankruptcy, the court can discharge your loan. This is not possible when you take a secured loan.
If you have a poor or nonexistent credit history, it will be almost impossible for you to obtain an unsecured loan. These loans also have higher interest rates than secured loans.
Installment Loans – Definition and Benefits
Learn what are installment loans and of the different benefit afforded to the bank as well as the customers by this repayment type.
What are Installment Loans?
An investment loan is a type of loan that allows you to borrow a specified amount of money from lender and pay back the borrowed amount plus interest in a series of fixed monthly payments. An installment loan is a good type of loan when you want to pay for part of your education, home or car. There are several things that lender will look at to determine whether you qualify for the loan or not. The lender will look at your annual income, your credit score and your debt-to-income ratio. Your debt-to-income ratio helps the lender to know how much your can afford to pay every month.
Benefits to borrowers
Installment loans have very many advantages to borrowers. That is why they are so appealing to many people. The key advantages of installment loans to borrowers include;
- Predictable monthly payments: Installment loans have a fixed rate of interest. This makes it easy for you as the borrower to predict the amount of money that he will be required to pay every month. A fixed interest rate is good for the borrower because he will not have to worry about increased rates in future.
- Lower monthly payments: Long loan repayment terms mean that you are going to make low monthly payments. This helps to make loan repayment less stressful.
- Fast processing: Generally speaking, it does not take long to have the money you need when you apply for an installment loan.
Advantages to lenders of different types of bank loans
The lender usually takes time to gauge whether the borrower has the ability to repay the loan. This decreases the chances of lending a person who does not have the ability to repay the loan. In most cases. The borrower has to provide proof of income, government issued ID and at least two references.