LOANS: Pick The Best Loan Type For Your Situation
LOANS: Pick The Best Loan Type For Your Situation: Definition of Loan
Loan is a sum of money that is borrowed from some person, bank or Financial Institute with an intention to pay back either with or without interest.
Most of the people don’t consider loans as a healthy sign because for a common person loans are only taken in times of distress or when someone is unable to meet the ends. However, in most cases business entities borrow loans from Banks or Financial Institutions in order to expand its business. If we look on a bigger canvas many developing countries borrow loans from developed countries in order to build infrastructure and generate employment.
There are different types of loans depending on the policies of each country. The following are a few types of loans that prevail in the market.
- Conventional Loans
Conventional loan is a mortgage typically borrowed by people for buying a home. It is therefore, more realistic to call them home loan. This loan is not offered, secured or guaranteed by the State or the Government. A client has to pay a fixed rate of interest within the set terms and conditions.
- Conforming Loans
As per the GSE (Fannie Mae and Freddie Mac) guidelines in the United States confirming loan is a mortgage loan. In 2017 the Federal Housing Finance Agency (FHFA) limited the amount for confirming loan up to $ 424,100 which has been increased to $ 453,100 in 2018.
- Non-Conforming Loans
Non-confirming loan is the loan request that fails to meet the set standard or criteria of the bank. There could be reasons such as the amount of loan requested is higher than the confirmed loan or the borrower do not have sufficient credit record or the use of funds not clear.
In general practice non-confirming loans can be funded private moneylenders or financial institutes, which normally charge high rate of interest. In this case the borrower should careful in selecting the lender who would be more reliable.
- Secured Loans
It is one of the common loan in which the Financial Institutions/ banks or private lender, whatever the case may be, obtain any asset such a fixed or immoveable asset as surety or collateral from the borrower. The loan amount is therefore secured against the surety provided by the borrower.
In the unlikely event if the borrower fails to pay off the amount the lender takes the asset and can sell off to cover the loan amount. However, if the sale of asset does not cover the cost of lending then lender has the right to seek legal action for the remaining deficit amount from the borrower.
- Unsecured Loans
Unsecured loan is opposite of secured loan. In secured loan one has to submit surety or collateral to receive a loan but unsecured loan supported by the borrower’s credit history, if the borrow has a strong credit history the unsecured loan may be approved. The best example of unsecured loan is credit card.
- Open-ended Loans
An open-ended loan is a revolving loan or credit line approved by the financial institution or the lender. It depends on the seriousness of borrower on repayment of loan amount before the due date, as agreed with the financial institution of the lender. The best example of open-ended loan is Micro-financing or SMEs are the best example of revolving loans.
- Close-ended Loans
The close-ended is the loan that is specific in terms of end date and amount and has to be payback to the financial institution or lender. Such loans includes home mortgage and car loans.