Grade 6 Lesson 4: Types of #Loans
In this lesson, we will cover the different types of loans. Broadly loans are classified as either Secured or Unsecured loans.
Secured loans:
Secured loans are loans for which the borrower is required to guarantee repayment, by pledging with property, for instance a car, a house etc. This property is called security or collateral. In such loans, there is a risk of losing the property used as security, in the event that the loan is not paid off. We will discuss some examples of secured loans below.
Unsecured loans:
Unsecured loans are loans that are given without pledges of repayment. This means that the borrower is not required to provide security to get the loan. Because of the high risk involved, unsecured loans are given out in smaller amounts and have higher interest rates.
Some examples of different types of loans:
Personal loans:
A personal loan is a 'small expense' loan that is mostly used by people to finance their day to day emergencies. They come in smaller amounts and therefore, just like most unsecured loans, they are easily approved.
Payday loans:
Payday loans are signature loans or cash advances that requires no security. This means that it is possible to get a payday loan even with a bad credit status or no credit at all. Payday loans are given on the basis of employment and income. However, payday loans have a high interest rate especially when the paying schedule is not followed. The high interest rates are a cost of convenience. Interest could run as high as 2000%, for this reason, it is not a good idea to take a payday loan if you don't expect to earn enough to repay it.
Auto loans:
Auto loans are loans given out by financial institutions or car dealerships, for the purpose of buying an automobile. Due to the nature of automobiles to lose value with time, Auto loans usually have high interest rates. The shorter the time an auto loan is paid, the lower the overall cost of the loan will be.
Mortgage:
Mortgage is a loan that is used specifically to purchase a house. Usually, a mortgage is given to you by a mortgage company or any financial institution, after evaluation of your potential to pay back the loan in full. A mortgage is a secured loan, therefore, providing collateral is necessary. Mortgage can be further classified into long-term and short-term mortgages, depending on the length of time required for the mortgage to be paid.
Credit card loans:
When you get a credit card, you have taken a loan. This is a credit card loan, and just like any other loan, it comes with interest and fees. Credit card loans are given out by credit companies and most banks today. The interest rates on credit card loans are higher than that on most personal loans, often around 15%.
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