Loans

Understanding Different Loan Types and What to Consider Before Taking Out a Loan Online

Whether you are experiencing financial difficulties, need to leverage your credit in order to make a purchase, or for some other situation, an online loan can be a good option.

In the last few years, the landscape of the lending industry has changed significantly. As a result, it is now possible for consumers to take out a number of different types of loans from various sources. Online loans are increasing in popularity and no longer is your local bank the only option. Consumers can now apply for and receive online loans. Understanding the different types of loans available can help you to understand your options, and therefore, choose the type of loan that is best suited for your specific situation.

Secured Loans Online

A secured loan refers to any type of loan that is taken out against something that you own, known as an asset such as a vehicle or a home. The asset is considered collateral. If you should happen to default on the loan, the lender will seize the collateral.

Generally speaking, the interest rate on a secured loan may be lower than an unsecured loan, and in fact, it could even be negotiable. Consumers with better credit ratings will typically be able to obtain better terms and interest rates on secured loans than they could with unsecured loans. Furthermore, the repayment terms for a secured loan may be flexible.

Examples of different types of secured loans include:

Auto loans
Recreational vehicle loans
Mortgages
Home equity loans
Home equity lines of credit

Unsecured Loans

An unsecured loan does not involve any type of collateral or asset being used as security. With this type of loan, the only recourse the lender has if you default is to freeze your account and attempt to collect the debt using a debt collection service.

The amount of money you may be able to borrow with an unsecured loan is generally tied to the ratio of your income, assets, and debts, as well as your credit history. Because the lender is taking on more risk, an unsecured loan usually carries a higher interest rate.

An unsecured loan may be referred to as a personal loan or signature loan. For consumers with extremely good credit, a signature may be the only requirement.

Examples of unsecured loans include:

Personal lines of credit
Personal loans
Student loans
Credit cards or other types of revolving credit

Different Ways of Borrowing Money

If you need to borrow money, there are different ways to do so.

Line of Credit

A line of credit works similarly in nature to a credit card. With a line of credit, you are provided with a maximum balance. You may borrow as much as you would like from the line of credit up to the maximum amount. The payments for a line of credit vary from a percentage of the outstanding balance to interest-only payments, depending on how the line of credit is structured.

Based on how the line of credit is arranged, you may be able to write checks on the account or it may be linked to your debit card. A line of credit may be either secured or unsecured.

Conventional Loans

A conventional loan includes loans that are often used for making large purchases, such as real estate or automobiles. However, it could also include a home equity loan or personal loan.

The amortization and repayment terms for a conventional loan are consistent and pre-determined. This means that when you take out a conventional loan, you will know precisely what your payment will be per month and for how many months. A conventional loan may be either secured or unsecured.

Payday Loans

Payday loans are also known as cash advances. These loans are often used by consumers who are looking for a quick cash solution for emergency needs. This type of loan is intended to be used as a short-term solution and is secured against your next paycheck.

Bridge or Interim Loans

A bridge or interim loan is also sometimes referred to as a single payment loan. This type of loan is generally used as a form of temporary financing and for short-term use only. A bridge loan will usually be paid in one lump sum at the end of the loan period rather than in scheduled installments. A bridge or interim loan can be a type of single payment loan. In some cases, a bridge or interim loan may be used to purchase real estate, including when building a new home.

Applying for Personal Loans Online

Prior to applying for a personal loan online, it is important to make certain that you understand the application process. Not all personal loans require a credit check to be run on the applicant. For instance, in some cases, a payday loan or cash advance may not require a credit check, as your next paycheck is used as security. For cases in which your credit history is a factor in being approved for a loan, you may find it helpful to obtain a copy of your credit history prior to submitting a loan application.

Take time to carefully review your credit reports from all three major reporting agencies, TransUnion, Experian, and Equifax, and resolve any problems or errors. You should also review your credit score. Keep in mind that lenders requiring a credit check may have minimum credit score guidelines, which means that you must have a minimum credit score to be approved for a loan.

The decision to apply for a loan is a big step. Prior to moving forward, be sure that you fully understand all of your lending options, as well as the advantages and disadvantages of each type of loan.