Understanding Types of Loans
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
