Understanding Types of Loans

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Collateral

A financial asset, such as a car or house; can be used as payment if borrower is unable to pay back the loan

Private Loans

A loan between a person and their parents, relatives, or friends. Typically small loans, and the deal may or may not include paperwork and interest rates.

Cash Advance Loans

A loan for a short time and are offered through credit card providers. Designed to be paid back short-term. Considered a predatory loan.

Open-End Loans

Allows borrowers to continue adding purchases up to a set credit limit; borrowers are expected to make monthly payments.

Home Equity Loans

Allows consumers to borrow a large amount of money by using the equity in their home as collateral to secure a loan.

Adjustable Rate

Allows the interest rate to vary during the life of the loan

Fixed Rate

An interest rate that remains the same while the loan is being repaid

Secured Loans

Backed by collateral that you own

Personal Loans

Can be used for most anything without restrictions and can be either secured or unsecured.

Which two types of loans are considered predatory loans?

Cash Advance Loans & Payday Loans

Auto Loans

Consumers receive money from a lender to purchase a vehicle.

Which is the most favorable type of student loan because of it having low interest rates and being interest free while students are still in school?

Federal Subsidized Loan

Three Types of Student Loans

Federal Subsidized Loan, Federal Unsubsidized Loans, & Private Student Loans

Types of Mortgages:

Fixed Rates and Adjustable Rates

Mortgage Loans

Loan to purchase a house or real estate

Unsecured Loans

Loans that don't require a collateral from borrowers

Student Loans

Offers students and their parents the opportunity to borrow money to pay for a college education.

Closed-End Loans

One-time loans for a fixed amount; borrowers make regular payments toward the balance.

Pawn Shop Loans

Short-term loans based on the value of the item (collateral) that a borrower brings into the pawn shop. The item is kept until the loan is repaid.

Payday Loans

Small loans usually under $500 that must be paid back by the borrower's next paycheck. Length of loan usually matches borrower's payday schedule.

Term

Specified time the borrower is given to repay the loan. Terms commonly range from 10-30 years (for mortgages)

Principal

The amount of money borrowed

Loan

The amount of money that consumers borrow from a lender with the agreement it will be paid back

Equity

The difference between the value of a property and how much is still owed on the mortgage of the property

Lien

The lender's right to claim the collateral until the loan is paid

Interest

The price borrowers pay to use the lender's money.

Credit Scores

Used to determine the financial responsibility of a borrower

Consumers rely on the annual percentage rate (APR) to

compare loans. Total cost of the loans includes interest and all the fees charged by a lender

Common reasons for personal loans are:

emergencies, medical care, weddings, & vacations

A lower APR means lower

monthly cost and overall cost

If a borrower defaults on an auto loan, the vehicle is:

repossessed

The amount borrowers pay varies depending on:

the loan terms, type of loan, amount being borrowed, and fees


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