A loan is money given to an individual, company, or a group of people to repay the loan principal plus interest at some future date. Loan agreements are usually agreed upon by both parties prior to any cash is advanced. A loan can be secured by collateral like a home or it can be non-secure like a credit card. There are various types of loans that are available.
Home Equity Loan: This type of loan is taken out to pay off existing home loan. The loan is secured by your home and the lending party may use your home as collateral to borrow a certain amount. Interest rates and loan terms will depend on the state where you live. If you can qualify for a Federal Housing Administration loan, you may receive a larger amount of money than if you applied for a conventional loan.
Unsecured Loan: A loan application to a non-bank lender is processed much similar to a secured loan application. It requires the borrower to provide information about their income, monthly expenses and personal credit history. Non-bank lenders are not obligated to lend money to individuals. If the lender finds that the borrower can repay the loan using collateral, they will approve the loan. This loan also has a higher interest rate because of the risk that the lender faces from approving the loan to someone who is unable to repay it.
Fixed-rate Loans: These loans have a specific, predictable interest rate. When the loan matures, the interest rate is permanently set and cannot be changed. These types of loans typically have a longer repayment schedule, while adjustable-rate loans have a variable interest rate that can be altered whenever the lender determines that the interest rate is appropriate. Some lenders allow the borrower to pay down the entire amount of the loan early, in order to avoid paying high fees. However, this option means that the borrower will be paying interest for a longer period of time.
Adjustable Rate Mortgages: These mortgages require the borrower to pay a certain amount of interest each month until the loan has been fully paid off. These interest rates are usually tied to the prime rate, which is the interest rate most banks use to borrow money. While the borrower pays interest on the principal, he or she pays principal and interest on the interest. Because there is flexibility in these loans, some borrowers opt to pay extra amounts of interest every six months to keep the principal manageable. This type of loan carries a slightly higher interest rate than fixed-rate mortgages.
Deed of trust: A mortgage loan can be either a traditional or a deed in trust. A deed of trust allows the borrower to use property as collateral for the loan. Security for the loan is provided by the lender, not the borrower. A borrower can still own property after taking out a deed in trust, but he or she must have equity enough to guarantee the loan. Once the loan is paid off, the lender retains ownership of the property.
Deed of trust: A deed of trust allows the borrower to use the property as security for the loan, but he or she must have enough equity to guarantee the loan. The loan could then be a signature loan, which means the lender would submit a request to a specific agency for funds. This agency then holds the funds until the borrower pays off the debt. A borrower holds title to the property while paying off the debt. Some types of this loan carry a higher interest rate than others.
In general, any kind of loan, equity or not, can be a good choice when borrowers need quick cash. However, borrowers should consider their options carefully and talk with a variety of lenders before accepting an offer. They should also consider the pros and cons of each option before accepting the lender’s terms. It may be worth it to refinance a credit card debt with a lower interest rate, but a higher monthly principal. Borrowers should do their research and carefully evaluate all of their options before making any decisions.