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Further
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‘Bad’ means ‘bad’ no matter where you go! It is cumbersome and heavy, a threat and negative. So, you are taking this burden of bad debt every time you make a loan application for personal loans. It can’t be translated into something good and...
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If you are thinking about starting an online business, I need to warn you about some of the people that you are going to 'meet'. Once you have a website or any form of online presence, these people will seek you out - I guarantee it! THE...
Learn To Embrace Failure - Lisa Saylor
Failure is a must to succeed in business and in life. So often we are told we can not fail, it’s a bad thing. From the time we start to school, till we go to the here after, fail, that 4 letter word is a bad thing. It is almost like a curse. ...
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Facts you should know about loan types
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Written By:
Prakash Menon
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When you set out to borrow, you often come across terms like unsecured loans, revolving loans, adjustable rate loans, etc. While these terms are more or less self-explanatory, it is still useful to be clear on their exact meanings and what they imply before you finalize a loan contract.
Unsecured versus secured loans
As the name implies, a secured loan is one where you offer collateral of some kind against the loan. That means, if you default on the loan, the lender has the right (but not the obligation) to take possession of the asset you have pledged.
In most cases, this asset would be what the lender has financed. For example, when you take a home loan, you offer the home as collateral.
There may also be cases where you may need to offer additional collateral over and above the asset that is being financed. This happens, for example, when the lender is financing close to 100% of an asset that is prone to rapid reduction in market value. In such cases, the lender may insist on your putting up another asset so as to provide a reasonable margin of protection to the lender in case of default.
Unsecured loans are those where such collateral arrangements do not exist. These loans are granted based on your credit standing, ability to repay and other factors.
All other factors being equal, a secured loan may be offered at a lower interest rate as compared to an unsecured loan. That’s obviously because of the lower risk associated with the secured loan -- should you default, the lender has an asset to fall back on. Sometimes you end up with a choice -- you can take a loan on either a secured on an unsecured basis. The difference in APRs may be quite significant in such cases. However, being offered a choice like this is comparatively rare in consumer financing, but may exist in financing businesses.
Installment versus revolving loans
A revolving loan is one where you have access to a continuous source of credit, up to a pre-determined credit limit. If the limit is say, $10,000, you can borrow any amount up to $10,000. And typically, you can repay all or part of the amount you borrowed at a time of your choosing, within the overall tenor of the loan.
You pay interest only on the amount you borrow for the time you borrow it. Sometimes, banks may charge a commitment fee for making a revolving line of credit available to you. This fee is usually charged on the average unutilized amount of your limit.
You can also re-borrow the amount you have repaid. In effect, you have a loan that's always available to you on demand.
Unlike revolving loans, installment loans have a - continued below ...
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fixed repayment schedule. In most cases, the full amount of the loan is drawn down (i.e., borrowed) at once and both repayment schedule and amounts are fixed in advance. You do not have the option to re-borrow the amount that has been repaid.
Adjustable rate versus fixed rate loans
A fixed rate loan is one where the interest rate charged is fixed for the entire duration of the loan. The advantage is that you are immune to fluctuations in interest rates and can budget your cash outflows precisely. The disadvantage to you (the borrower) is that should interest rates fall, you lose in terms of opportunity costs. That is, you could have obtained a lower interest rate had you opted for an adjustable rate loan.
In practice, you can always choose to refinance the fixed rate loan at a lower rate if interest rates fall sharply enough to justify it. Bear in mind that your current lender may charge a pre-payment fee if you choose to repay before due date. So the difference in interest rates between your old fixed rate loan and the new loan should be large enough to justify a switch.
An adjustable rate loan is one where the interest charged fluctuates in line with a benchmark rate. This benchmark rate is usually the Prime Rate, which is what the US Treasury charges its prime (or best) borrowers. The advantage of an adjustable rate (or floating rate) loan is that what you are paying is more or less in line with the market. If interest rates decline, so do your costs and vice versa. The disadvantage is that your cash outflows for interest are unpredictable.
As a borrower, if you hold the view that interest rates are going to decline, it is best to opt for an adjustable rate loan. But arriving at the correct view consistently is easier said than done. Predicting interest rates is a game where even professional market participants and institutions frequently go wrong.
If it is important to you to be able to budget for your interest obligations in advance, a fixed rate loan may be the best choice. After all, you can refinance it should the interest rates fall significantly.
Keeping these basic facts in mind should help you make more informed borrowing decisions.
About the Author
Prakash Menon is a financial expert and writer specializing in managing personal debt and providing wealth building solutions. He has written on
cash advances, short term debt, personal debt management and other topics. See http://www.payday-cashadvances.net for the 10 things you must look into before you take a payday loan.
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| _Additional Resources ... |
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PR: How Sweet It Is! - Robert A Kelly
Please feel free to publish this article and resource box in your ezine, newsletter, offline publication or website. A copy would be appreciated at bobkelly@TNI.net. Net word count is 800 including guidelines and resource box. Robert A. Kelly...
A Simple Plan To Market Online - Earn Money Instantly! - Heri Rosyadi
So you want to make money online but you dont have your own products and have no marketing idea. I will give you a simple solution to your problem. 1. You Need a product to sell The first thing you need to do is to find a with niche market. My...
Price your eBook to Sell Well - Judy Cullins
Q. The big question asked me in teleclasses or client sessions is "How should I price my eBook? A. The big answer is "it depends." Here's seven tips to help: 1. Determine your audience's need and demand for your book. If your book solves...
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