A loan is an amount of money that people borrow and are expected to pay back with interest. Being approved for a loan depends on different factors like income, credit, and debt history of a borrower. The need for taking a loan usually arises when someone wants to spend more capital than readily available. For instance, starting up a new business venture or buying a new house. Fortunately, there are several ways to apply for a loan. However, knowing maximum credit options enables people to settle on the best options to meet their goals. This article will provide guidance regarding different types of loans and credit options.
Conventional Loans
The term conventional loan is also known as a mortgage loan. The government or its agencies do not insure these types of loans like the Veterans Administration, Rural Housing Service, or the Federal Housing Administration. In Conventional loans, creditors follow the guidelines provided by Freddie Mac and Fannie Mae. This type of loan can either be conforming or non-conforming loans.
Conforming Loans
A conforming loan is the type of loan that follows guidelines set by Freddie Mac and Fannie Mae. The amount of a conforming loan depends upon the location of the borrower’s home. For example, people who have houses in high-income areas can apply for a larger loan than those who live in general or low-income areas. Other parameters used to measure borrowers’ eligibility are concerned with the credit history of the borrower and their and debt to income ratio.
Non-Conforming Loans
On the other hand, the non-conforming loan does not follow Freddie Mac and Fannie Mae’s set guidelines. If an individual wants to borrow a larger amount, then they can go with the non-conforming loaning option. Non-conforming loans are also known as Jumbo loans.
Secured Loans
Secured loans are also known as a collateral loan. In this type of loan, a borrower leverages his personal possessions and property to be approved for a loan; in case of default, all the property transfers to the lender to cover the loan amount. The interest amount in this type of loan depends on the property’s worth. Factors like the credit history of a borrower and loan term length are also considered important aspects when considering a secured loan.
Unsecured Loans
An unsecured loan does not require any type of asset security. This type of loan is usually difficult to get because it is completely based on the borrower’s credit history. It has a higher interest rate, which is also determined by the income of the borrower. If a borrower defaults, the lender can employ different collection options like a lawsuit or debt collector in order to recover the loan.
Open-ended Loans
Open-ended loans are also considered revolving credits. This type of loan amount can be re-borrowed after paying it. One of the most common forms of open-ended loans is credit cards; however, home equity loans and HELOC (Home equity lines of credit) also belong to the open-ended loan category. In this type of loan, interest rates are based on the borrower’s payment history and credit scores.
Close-ended Loans
A close-ended loan is the type of loan that cannot be borrowed again after repaying it. For instance, mortgages, student loans, and car loans fall under the category of close-ended loans. In this case, the loan decreases after each installment, and if a borrower wants more credit, he has to re-apply for a new loan and follow the whole process to be approved once again.
Loan from Friend/ Family Member
This type of loan is not based on any credit score but can put the borrower’s relationship at stake. Before taking advantage of this loan, it is highly recommended that a loan agreement be made and should spell out clearly the terms and conditions of the loan. This kind of loan requires a good amount of faith and trust between both parties. Loans from friends or family members should be taken only if a borrower can pay back on time.
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