You need money to buy almost everything these days. If you don't have the necessary cash on hand chances are you will get a loan. Some common uses of loans include: buying a car, home improvements, paying for college tuition, buying a home or anything else that requires some form of cash outlay. When you do need to borrow you will contact your bank, credit union or some other form of financial institution.
Some elements of all loans are similar. You borrow money, which is called the principal and you agree to pay back the loan within a specific length of time, or term, at a specific interest rate. Beyond that, loan terms can have any of the following conditions: installments or lump sum repayment, fixed or adjustable interest, and secured or unsecured.
Installment Loans
With an installment loan you borrow the full amount of money at one time and you agree to repay the loan in installments or set payments on a regular schedule. A home mortgage is an example of an installment loan. You make installment payments on the same day each month.
Lump Sum Loans
With a lump sum loan you can borrow a set amount and agree to pay that amount back in full plus interest on a specific date. Many personal loans are handled in this manner.
Secured Loans
Secured loans require you to put down some collateral, usually in the form of property, to guarantee it. If you fail to pay off the loan or default on it, the lender may take the collateral as a form of repayment. A home equity loan is one of the most common forms of secured loans.
Unsecured Loans
An unsecured loan is made primarily on the promise that you agree to repay. Typically, based upon your credit score, if a lender deems you a good risk you will be granted the credit. However, if you lack good or sufficient credit a lender may require you to get a co-signer. A credit card is an example of an unsecured loan.
The loan types listed above can have either a fixed or adjustable interest rate. A fixed interest rate means the monthly payments stay the same for the length of the loan. While adjustable interest rates have variable interest rates that change periodically.