Finance/ Loans – Types of Loan: Bank loans are an excellent source of finance for short-term and long-term credit needs. Borrowers typically qualify for bank loans on the basis of their creditworthiness. Most lenders fix interest rates on the basis of the borrower’s credit rating. A higher credit rating is demonstrative of a borrower’s sound financial standing, which enables lock-in at a lower interest rate.
Note: Please also see our extensive mortgage section.
Types of Loans
The scope and coverage of bank loans vary from lender to lender. Most lenders have strict terms governing the loan proceeds. Depending on need, borrowers can consider the following dedicated loans:
Business Loans: These loans may be long-term for funding asset procurement or short-term for financing working capital requirements. Startup entrepreneurs may be required to offer collateral. Moreover, borrowers are asked to present a business plan to become eligible for such loans.
Student Loans: These loans are intended for funding higher education in the absence of scholarships and grants. Initially, student loans only covered tuition. Currently, education loans cover other expenses pertinent to a college education, including accommodation, books and supplies. Student loans in the US are offered by private financial institutions, as well as the US federal government. The latter accompanies lower interest rates and flexible repayment terms.
Home Loans: These are long-term loans, with repayment periods as high as 30 years. The interest rate on such loans may be fixed or adjustable, varying according to the financial market. A borrower may also opt for balloon rate home loans, where interest rates are very low for 7-10 years of the loan duration, after which they have to repay the entire loan balance at once.
Car Loans: These loans may be acquired to purchase new or used cars. The average payment duration on a car loan is usually five years. Most car loans are unsecured, since the vehicle itself is put up as collateral and may be repossessed should the borrower fail to meet loan payments.
Finally, one may consider applying for a cash loan, if they do not fit into the following categories. However, note that cash loans have extremely high interest rates and must only be used as a last resort to fund short-term credit needs.