Loan Terminologies and What They Mean

Loan Terminologies and What They Mean

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If you are shopping for a personal loan, you have a number of options available to you. Not all options are equal and some may cost you plenty in fees, interest rates and penalties if you are not careful. Be an informed consumer and carefully learn what options you have when borrowing money. Negotiate your terms and if you cannot strike a favorable deal, then look elsewhere.

1. Payday loans. Also known as cash advance loans, these short-term loans are unsecured, which means you’ll pay a higher interest rate than you would for a secured loan. Loan terms are typically for two weeks and interest rates are extremely high, in some cases they top more than 100 percent when carried out to the annual rate. Typically, these loans are easy to get and the money is wired into your account. Its emergency money that can help you in a pinch, but it can also take a big bite out of you in loan costs.

2. Secured loans. A secured loan is any loan that requires collateral. Collateral is something of value that you “put up” to secure the loan. For instance, if you want to borrow money to buy a swimming pool, your lender may require that you back that loan with another asset that you own outright such as a boat or a car. Secured loans typically have better loan terms as you assume some risk if things go bad. And if they go bad, the secured item is then taken to pay the debt.

3. Unsecured loans. You may be able to borrow money without putting up collateral. Such loans are unsecured, which means the lender is taking some risk by not requiring collateral. If you fail to pay the loan, you’re still legally liable for what you owe, but without an asset in place, the lender has nothing to sell to recover his loss. A payday loan is unsecured as are most credit cards. Some bankers will issue unsecured loans, but much depends on your credit history and your ability to repay the loan.

4. Open ended loans (or credit). Some loans do not have a definite term or end date, effectively empowering the borrower to determine how much he wants to borrow and when. Lines of credit are an example of such loans, money that the consumer can tap when needed. The advantage of such loans is that interest does not accumulate on the unused portion of the loan.

5. Closed ended loans (or credit). A closed-end loan is distributed to the borrower in a lump sum at loan closing. That means it must be repaid, interest and finance charges included, by a certain date. Typically, periodic payments (monthly) are made to reduce the debt, but in some cases the entire amount is due on a specified date. That requirement constitutes a balloon payment.

6. Conventional loans. A conventional loan is a term used to describe real estate, in particular a loan that is not backed (insured or guaranteed) by the federal government. Both fixed and adjustable rate mortgages are available.

7. Unconventional loans. If your banker says “no,” to whom will you turn? You can still try other banks, but the federal government through the FHA may step in to guarantee the loan. The disadvantage to the borrower is that loan limits are generally lower, which may mean a larger down payment.

Loan Considerations

Be mindful that loan terminology can sometimes seem unclear. If you are not sure what loan is being offered, ask the lender to break down that information for you. State and federal laws require full disclosure, but understanding your terms clearly is essential for getting a loan that is right for you.

See AlsoHow Payday Loans Work

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Categories: Consumer Financing

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