In this article, we will review loan types. This will help save your time and effort in the process of finding the right loan product.
Types of loans can be classified according to various criteria. Let’s consider the main ones. So, loans are classified:
1. by length:
- short-term (1 week to 1 year);
- medium-term (1 to 3 years);
- long-term (3 years and longer).
2. by security:
- secured (by collateral, safety, guarantors);
3. by type of interest rate:
- fixed (interest rate is fixed for the entire period of the loan agreement);
- floating (the rate is not fixed and is calculated according to the formula defined in the agreement).
4. by the form of provision:
- one-time provision of the definite amount under the loan agreement;
- credit line;
- credit card;
- overdraft – lending to the current account.
5. by target basis:
- non-purpose (funds are spent at the sole discretion of the borrower);
- purpose (personal loans for specific purposes and purchases, mortgages, car loans, student loans, etc.).
Let’s consider in more detail the features of some purpose loans.
A personal loan is intended to meet personal and household needs, both in durable goods and in other goods. Typically, the term of such loans does not exceed five years. Interest rates are quite high and depend on the loan type. Some banks approve personal loans to consumers having only 2 documents – a passport and another identity document. This practice is quite common. Only in rare cases, the lender may require additional documents confirming the borrower’s income, as well as ask to provide collateral.
In addition, banks usually provide preferential conditions to existing customers who have a deposit or an account in the bank, as well as to clients who have already taken out a loan and repaid it on time.
There are the following ways to get a personal loan:
- Lump sum of the loan amount (eg. payday loan). When you contact a bank office, you conclude a loan agreement and receive the entire loan amount in cash or on a card. And then you repay the loan and interest according to the established schedule;
- A line of credit. In this case, you can get a loan not in a lump sum but in installments as needed.
- Credit card. In this case, you receive a revolving loan for the entire validity period of the card, as well as the opportunity to use borrowed funds for free, provided that the debt is repaid on time during the grace period. But the possible amount of a loan provided by a credit card is usually less than in the previous two options, and the interest for using a loan (if you did not pay off the debt during the grace period) is higher. However, thanks to a credit card, you will be able to pay for goods and services via the Internet;
- Commodity loan. This is one of the types of a personal loan but it is provided not at the bank’s office but at the outlets at the time you make a purchase of a certain product. In this case, the cost of the selected product is paid at the expense of the loan amount approved, which will subsequently need to be returned to the bank. However, one should bear in mind that the interest on such a loan is quite high.
So, personal loans are able to satisfy small daily needs of consumers for goods, services, etc.
A car loan is one of the most popular types of retail lending. Due to the increased demand, car loans are gaining momentum. Banks that provide car loans conclude agreements and develop various partnership and loan programs in conjunction with car dealerships. This type of loan is offered for the purchase of both a new and a used car.
A prerequisite for car loans is the registration of the purchased vehicle as collateral. Often, consumers will need to buy car insurance. This allows you to reduce the interest rate on the loan. A car loan is usually provided for a period of 1 to 10 years.
Thus, if you have a need to purchase a vehicle but do not have enough money, feel free to apply for a car loan and choose the most favorable conditions for your budget and needs.
Mortgage loans are no less popular and offered by various banks. Such a loan is designed to help consumers buy a home. Mortgage loans compensate for the gap between high real estate prices and relatively low incomes of the population. Under such conditions, it is possible to save only for an initial payment, which should be at least 10% – 20% of the cost of the acquired housing. In turn, banks offer various mortgage programs with preferential terms.
When purchasing housing under construction, you should apply for a mortgage in banks that have accredited the corresponding construction project. In this case, there is no need for additional verification of the developer and the project documentation, as well as additional approval of the equity participation agreement with the bank.
A mortgage loan has a long term and a relatively low-interest rate. The acquired real estate is held by the bank as collateral for the entire period of the agreement.
A student loan is a form of financial aid that is given to college students. There are several different types of loans available to students. Some of them have very favorable interest rates and repayment terms. Students can use such loans to pay tuition and living expenses, as well as other education-related expenses such as purchasing computers, travel expenses, etc. The goal of most student lenders is to make education accessible to everyone, and the lender is betting that people will be able to repay loans after they have completed their market skills training.
A home equity loan is the cheapest bank loan. If you have the opportunity to provide collateral (apartment, house) to the bank, you’d better use this particular type of product. The rate on a home equity loan is really very low compared to the rate on an unsecured loan.
A loan secured by real estate is usually provided to borrowers between the ages of 21 and 75, although some banks may have more stringent requirements. In addition, you will need to be a legal U.S. citizen and be employed for and a certain period, which is usually at least six months.
The list of documents for a home equity loan is standard. This is an ID, proof of income and employment. The latter may differ depending on the requirements of a particular lender.