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Types of Loans You Need to Know About

Personal Finance
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By Josefina Breitenberg

April 28, 2021

Borrowing money from  your bank can have various reasons, from buying a home to buying an engagement ring. Your bank is at your service to lend you the desired amount of loan that suits your requirement. However, there are several types of loans that come with different policies and conditions and before choosing to go with a loan, it is important to understand all the types so you can pick the loan that best suits your needs. 

Key notes to remember 

  • Personal loans are a form of credit that you can use to make big personal purchases and this loan usually comes with high interest rates. Although the interest rate of credit cards is higher than that of a personal loan but comes without collateral, which means you are not required to seize an asset of value with your bank. 
  • A home-equity loan serves with a very little interest rate. The borrower is required to use their property/home as the collateral with the bank and the loan amount granted to the borrower is calculated according to the value of the property.
  • Cash advance is a service that allows credit card holders to withdraw amount up to a certain limit as a short-term loan from the bank, using the ATM or from the bank, or from a financial agency. However, this service will have a very high interest rate.

Credit Cards 

Using your credit card to make a purchase is equivalent to taking a small personal loan from your bank. However, the amount of the interest rate shall be based on the time period of when you pay the loan back. Your bank will provide you a deadline based on the amount of credit you used from your credit card, and it will be incumbent upon you to pay your debt off within the given time frame. In event of crossing the deadline, the interest rate will increase and you will need to pay the interest every month until the debt is paid back. If you are able to pay back the debt within the given time frame, no interest rate will be charged. 

By the quarter of 2019, the average credit card interest rate showed a 16.88% APR. A slight drop from 2019 fourth quarter to the rate of 17.14%. However, after being down slightly with the rate of 17.14%. but almost stable where it was in 2018, with the rate of 16.86%.

The penalty rate for consumers making late payments can increase higher to 31.49% on two of HSBC’s MasterCards.


Credit Card Cash Advance

Every credit card offers a cash advance facility which allows users to withdraw cash money from any ATM machine. This is the most expensive way to borrow money. This facility usually comes with a fee, equal to 3% to 5% of the amount being withdrawn, or a minimum fee of $10. The worst is that the cash advance adds onto the credit card balance, implementing interest each month until the loan is paid back.


Consumer interest in revolving debt

The difference between a personal loan and a credit card loan is that loan from a credit card represents revolving debt, which allows the consumers to borrow money from the bank unlimited times. And as long as the consumer is able to pay the debt back within the given time, they won’t need to pay an extra interest rate since they have given back whatever they borrowed on time. Credit card loan is different from personal loan in many which has a guaranteed balance and a payment structure. Credit card loans are easier, faster and can be bought as many times as needed. A research showed that people tend to make more purchases with credit cards than with cash and a short application makes it convenient for consumers to borrow any amount of sum, whether it’s $2000 or $15000. 


Personal loan

A personal loan is offered by all banks and can be used for personal needs from buying a play station to a diamond ring. However, this loan is expensive compared to credit card loan. The interest rate on this loan is usually very high since this method is not secured by any collateral. The bank will have nothing to take from you in event of the borrower failing to pay the loan back. Due to this risk, the bank compensates itself by charging you a high interest rate. The bank will ask the borrower to provide income proof and proof of property or any assets that should be worth of the loan being borrowed, however, the assets will not serve as collateral with the bank. The time period to pay back the loan is 2 to 5 years. 

Personal loan rate comparison 

According to Federal Reserve, the interest rate of commercial bank 2-year loan plan was 10.21% in 2019. However, the interest rate can 3 times top that amount. Avant’s APR’s range from 9.95% to 35.99%.

Low interest rates are available to consumers with high credit ratings and valuable assets. 

A personal loan calculator provided by your bank can be used to calculate the rates for clarity. This loan is a good choice for borrowers who are looking to take small loans and are certain they can pay the debt back within a few years. 


Bank Loan vs. Bank Guarantee

A bank loan and a bank guarantee are two different things. A guarantee may be issued to a third party on behalf of a customer. In case the customer fails to meet the contractual obligations with the third party, having being failed, the third party can demand the payment from the bank.

Most commonly, the guarantee revolves around the bank’s business clients.

A contractor’s bid maybe accepted by a corporation on the condition of the contractor’s bank issuing a guarantee of payment in case the contractor fails the contract.


Home-Equity loans

For those that own a house, there is an opportunity to borrow a loan equal to the price their house is worth. Let’s say, only half the mortgage is paid, while half is due, they can still be granted a loan in the equity of the paid mortgage. To sum it up, the difference between the property’s Market value and the amount owed on the mortgage is the amount of the loan that can be borrowed.

The advantage of a home-equity loan is the low percentage of the interest rate which compared to that of a personal loan is relatively less. The disadvantage of this loan is the collateral for the loan. In event of failing to pay the bank back on time, the borrower can lose possession of the house. 

Before deciding for taking a home-equity loan, the borrower must keep the 2008 – 2009 financial disaster in mind. When during the economy collapse jobs fell in jeopardy and property value drastically dropped.


Home-Equity Lines of Credit (HELOCs)

Taking loan from HELOC is very similar to how the credit card loan works. The borrower can derive maximum amount of credit and can pay it back in the given time frame. The difference here is a collateral will be required to take any amount of loan.

Business Loan

This loan is sought by people looking to start up small businesses or by business owners looking to expand their running business. The bank will take the business owner’s assets as collateral for lending the loan. Interest rate on this loan is negotiable, depending on the value of the assets given as collateral. 

We hope this article helps you making the best choice in choosing your loan. Are you planning to take any loans this year? Do share with us  in the comment section below.



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