With so many different types of bank loans that are accessible today, how do you pin down the right type of loan for your needs? Ideally, you want to opt for a loan that doesn’t make your financial situation worse if you’re already in a financial pickle.
But not everyone that takes out a loan is in financial duress. Sometimes, you may just need a small jump start to get a new business on its feet, or maybe you want to purchase your first home?
Whatever your situation, knowledge is power when it comes to choosing the right loan. Allow this blog to be your guide.
Two Different Types of Bank Loans to Consider
No matter the type of loan you choose, they all vary based on two major factors: the term of the loan and the security (also known as collateral) that’s required to obtain the loan.
In short, you have two loan choices to decide between — a secured or unsecured loan:
1. A Secured Loan
In order to take out a secured loan, your lending institution, ie. the bank, will look at what type of collateral you have to offer them. This form of collateral includes large, valuable items such as your car, home, equipment, or other forms of property.
The main benefit of a secured loan is that the interest rate is far lower than that of an unsecured loan. This is because the bank has your collateral to rely on should you default on the loan.
Secured loans also offer longer repayment terms, making them more affordable to pay off over time. You can also loan a greater amount of money with a secured loan, depending on what you offer as collateral. Check out https://www.farmersbankidaho.com/ for more.
2. An Unsecured Loan
These are short-term loans and do not require any form of collateral upon signing up. However, one of the main considerations when taking out an unsecured loan is that you have a lower borrowing rate. You can only secure this type of loan based on your credit score, too.
With unsecured loans, you will have to pay it back at a higher interest rate as the bank does not have anything to fall back on, otherwise. The repayment terms of this type of loan are also far shorter — meaning you will pay back more, over a shorter period of time.
Under the umbrella of these two main types of loans, you’ll find a plethora of sub-categories. Some of these loans are tailored to suit specific needs, such as buying a home, supporting a business, etc.
Let’s dive into a little more detail…
A Personal Loan
A personal loan is unsecured and quite low-in-value. In short, these are not the best types of loans to take out, but are handy if you are in a financial bind.
For example, if you need funding for a major life event, an emergency, or major home or car repairs, then a personal loan can help when you’re in financial straits.
The approval process for a personal loan is generally quite easy and seamless. All you need to provide is a form of identification and proof of assets greater than or equal to the loan amount. However, the catch is that the interest rate is very high and the repayment period short.
In other words, you may end up paying more than the original loan amount once the loan is completely repaid.
A Working Line-of-Credit
This is just a fancy term for taking out a credit card. In a nutshell, the bank offers you a line-of-credit set at a maximum spend amount. You can access this line-of-credit as and when you need for either personal use or business use.
It’s almost the same as a checking account, only you pay interest on the money you spend. Most banks offer a line-of-credit that is renewable after a period of 90-days, but also up to several years.
Your maximum spend amount also varies depending on your earnings, i.e. the adequacy of your cash flow and whether you can repay the line-of-credit, with interest. These amounts range from as little as $500 up to several million dollars.
The interest rate is market-related, and you only pay interest on your outstanding balance. You will have to pay back a minimum amount each month, depending on what you’ve spent, too.
A Short-Term Commercial Loan
A short-term commercial loan is a secured loan, similar to a mortgage loan. You could also use a short-term commercial loan the same way you would a working line-of-credit — they are interchangeable loans.
For example, if you were a new business in need of working capital, this is a good loan to consider. A short-term commercial loan is most popular among businesses for major purchases, such as equipment, etc.
You can borrow a fixed amount of money over a set period of time, while the interest you pay is based on the lump sum (total loan amount). A short-term commercial loan requires adequate collateral or needs to be supported by adequate cash flow and a good sales history.
They are called short-term loans because the repayment period ranges from 90-120 days but can extend for up to three years.
A Long-Term Commercial Loan
This is the exact same loan as the above, except you get to repay it over a far longer period. You generally have a minimum of three years as a repayment period but can choose a timeframe of up to 10 years.
Due to the fact that there’s more risk involved in terms of repayment for the bank, these types of loans are a little more difficult for businesses to secure. The bank may not be willing to take the risk of you not repaying the loan if your business goes under before the loan term ends.
In this case, you will have to offer collateral for the loan and you will have a time-limit of five to seven years for repayment.
A Home Equity Loan
This is a popular type of loan for new families looking to invest in property. A home equity loan is most commonly called a mortgage. They are large, long-term loans that span a period of 15-30 years. They require some form of upfront collateral, too. Most of the time, the home you buy becomes the collateral for the loan.
Interest rates on mortgage loans are quite low, some as low as just one to two percent. But this is because principal costs are high and there are large fines associated with not paying the interest on your mortgage.
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These are just a few of the different types of bank loans you have access to today. Before taking out any loan, of any kind, you want to consider all of your options first.
If you’re looking for this type of financial knowledge, be sure to explore the rest of this site for more. We also offer articles on all things business, technology, travel, the list goes on. Explore as you please!