Types of Loans

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Here are a few of the most common types of loans

Single loan:

Sometimes called a bridge or interim loan is for a short-term. This type of loan needs to be paid back at the end of the loan period. The total of the interest and the principal amount are paid at the expiration date.

EMIs (installment loans):

Payments on these loans are made at defined intervals of time, usually monthly. The longer it takes to pay back the loan, the more interest is paid.  Home and vehicle loans fall into this category.

Secured loans:

When personal possessions are offered by the borrower as collateral to the lender which the lender can use to recover the loan if the borrower does not pay back the loan, it is called a secured loan.  Collateral is usually a house or a car and the loans are at a lower rate of interest.

Unsecured loans:

Loans not attached to collateral are unsecured loans.  These types of loans are offered to only those having superior credit ratings, usually individuals or companies that have high net worth.

Fixed rate loans:

The vast majority of loans are in this category. The interest rate remains unchanged throughout the period of the loan. The interest rates for a fixed rate loan are often larger than variable interest rate loans.  This is because the lender has to account for the probability of fluctuations in the market.

Variable interest Rate Loans:

As the name suggests, the interest rate fluctuates with the prevailing market and the borrower pays accordingly. The rate is usually lower in the beginning but is adjusted from time to time within the duration of the loan.

It is a good idea to seek advice from a financial advisor professional before you agree to a loan. Getting the wrong type of loan for your needs will cost you money in the long run. For example if you can make payments twice a month instead of once per month you can save thousands of dollars and cut mortgage payments by many months.

Should You Save Money or Pay Off Debt?

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