Loan Types: Which One Should You Get?

Are you looking for a loan for emergency finance? You’re not familiar with the different loan types and don’t know what to get? This article explains the different types of loans and which are best for your financial needs. There are four types of loan.

Secured Loans

The first type of loan is a secured loan. As the name implies, a secured loan requires that an asset is offered as collateral for the loan. Assets may include property, cars and houses.

Secured loans give the financial institution security in case the borrower defaults on the loan. If this happens, the lender (such as a financial institution or a bank) reclaims the collateral and sells it to recover the sum invested.

Secured loans are best for financing the purchase of property such as a car or a house, because they typically offer a low interest rate. For smaller sums, secured loans are a poor choice because of the requirement to offer collateral.

Unsecured Loans

The opposite of a secured loan is an unsecured loan. These loans are not secured against the borrower’s assets. Unsecured loans are best for minor loans because you don’t need to provide collateral to the lender. There are different types of unsecured loans such as:

  • Bank overdrafts,
  • Credit card debt,
  • Unsecured corporate loans,
  • Personal loans, and
  • Lines of credit.

Unsecured loans may, or may not, be regulated by law depending on local financial regulations. Unsecured loans usually have higher interest rates than secured loans because there is a greater risk of the lender not being compensated if the borrower defaults. This is because the loan is not secured against an asset so the lender’s recourse is limited, and where the borrower can be sued, the law usually prioritises secured loans to be repaid from the borrower’s assets before any unsecured loans. Interest rates for unsecured loans also depend on the type of loan obtained. This is why unsecured loans should not be used for major purchases: the larger the loan, the greater the amount of interest you will have to pay off.

Subsidised Loans

Subsidised loans are offered free from interest. An example of this is a student loan, where interest does not accumulate while the student remains at university.

Demand Loans

Demand loans are short-term loans. There are usually no fixed dates for repayment, but the lender can call for repayment at any time, hence the term: ‘demand loan’. Demand loans can be secured or unsecured.

Before getting any loan, it is essential to decide on the right type. Starting with the right loan will allow you to repay the debt easily and lets you build a good credit history. You can talk to a financial expert or any financial institution about thetypes of loans. All of these types have their pros and cons so you should study them carefully.

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Carl Richardson is a financial expert who advises on borrowing and debt consolidation. Carl recommends understanding your loans to ensure that you can repay them efficiently.