Types of Loans

There are various types of loans in the U.S. and this is only natural to say that the majority of Americans live on credit. It is thus important to understand the difference between the loan types in order to not be confused what to choose.

Open-ended loans. First of all, open-ended loans. This is the type of credit that allows a borrower to take a loan many times, again and again. Among the most common loans in this category are credit cards as well as line of credit. There is some credit limit that you are not allowed to breach. Each and every time a borrower takes some kind of a purchase, next time they will have less available credit; and as you make payments, it increases accordingly.

Closed-ended loans. These are the opposites - the loans that once taken, should be repaid on due time and cannot be renewed. There is no available credit in such loans and you simply have to repay the amount plus interest on a due day. Among such loans the most common are mortgages, student loans and payday loans.

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Secured loans. This type of loans as their name suggests are supposed to be granted under some kind of collateral or guarantee of repayment. Collateral can be different - any asset, valuable possession or property that can cover the loan amount. These loans usually have lower interest rates due to the fact that default repayments are fraught with the loss of collateral. On the one hand these loans are cheaper, on the other - they are much riskier.

Unsecured loans. As it is also clear from the name - these loans do not require any collateral. They are granted without co-signers either. There is no need to be worried about your property in case of delays or non-repayment. However, the not so bright side here is that unsecured loans are more expensive in terms of interest rates. These loans are rarely granted to borrowers whose credit score is not good and bad credit customers' chances to get one are almost non-existent. As there is no option of punishing a faulty customer with taking their collateral, lenders practice other methods such as debt collectors' assistance and even law suits.

Conventional loans refer to loans that are issued by non-governmental institutions such as Veterans Administration or Rural Housing Service and etc. They usually comply with the guidelines of Fannie Mae and Freddie Mac; those loans that do not comply are called non-conforming.

Payday loans are unsecured loans that are provided by independent lenders for a short term usually and they are secured by a borrowers following paycheck. These are high APR loans and they are meant to cover unplanned urgent expenses and financial complications.

Advance-fee loans are yet another loan type; although, they can hardly be referred to loans in general at all. They are more like wire-transfers that should be opted for in cases when no other options are available. The reason is that this business has got a great deal of scammers and it is important to find the lender who is not the one.