Types of Consumer Credit Loans

Loan contracts come in all kinds of forms and with varied terms, ranging from simple promissory notes between friends and family members to more complex loans like mortgage, auto, payday and student loans.

Banks, credit unions and other people lend money for significant, but necessary items like a car, student loan or home. Other loans, like small business loans and those from the Department of Veterans Affairs, are only available to select groups of people.

Regardless of type, every loan – and its conditions for repayment – is governed by state and federal guidelines to protect consumers from unsavory practices like excessive interest rates. In addition, loan length and default terms should be clearly detailed to avoid confusion or potential legal action.

In case of default, terms of collection of the outstanding debt should clearly specify the costs involved in collecting upon the debt. This also applies to parties of promissory notes as well.

If you are in need of money for an essential item or to help make your life more manageable, it’s a good thing to familiarize yourself with the kinds of credit and loans that might be available to you and the sorts of terms you can expect.

Types of Credit: Open-End Closed-End Credit Options

The two basic categories of consumer credit are open-end and closed-end credit. Open-end credit, better known as revolving credit. can be used repeatedly for purchases that will be paid back monthly, though paying the full amount due every month is not required. The most common form of revolving credit are credit cards, but home equity loans and home equity lines of credit (HELOC) also fall in this category.

Credit cards are used for daily expenses, such as food, clothing, transportation and small home repairs. Interest charges are applied when the monthly balance is not paid in full. The interest rates on credit cards average 15 percent. but can be as low as zero percent (temporary, introductory offers) and as high as 30 percent or more, depending on the consumer’s payment history and credit score.

Closed-end credit is used to finance a specific purpose for a specific period of time. They also are called installment loans because consumers are required to follow a regular payment schedule (usually monthly) that includes interest charges, until the principal is paid off.

The interest rate for installment loans varies by lender and is tied closely to the consumer’s credit score. The lending institution can seize the consumer’s property as compensation if the consumer defaults on the loan.

Examples of closed-end credit include:

• Mortgages
• Car loans
• Appliance loans
• Payday loans

Types of Loans

Loan types vary because each loan has a specific intended use. They can vary by length of time, by how interest rates are calculated, by when payments are due

and by a number of other variables.

Student Loans

Mortgages

Auto Loans

Personal Loans

Loans for Veterans

Small Business Loans

Small business loans are granted to entrepreneurs and aspiring entrepreneurs to help them start or expand a business. The best source of small business loans is the U.S. Small Business Administration (SBA), which offers a variety of options depending on each business’s needs.

Payday Loans

Payday loans are short-term, high-interest loans designed to bridge the gap from one paycheck to the next, used predominantly by repeat borrowers living paycheck to paycheck. The government strongly discourages consumers from taking out payday loans because of their high costs and interest rates.

Borrowing from Retirement Life Insurance

Those with retirement funds or life insurance plans may be eligible to borrow from their accounts. This option has the benefit that you are borrowing from yourself, making repayment much easier and less stressful. However, in some cases, failing to repay such a loan can result in severe tax consequences.

Consolidated Loans

A consolidated loan is meant to simplify your finances. Simply put, a consolidate loan pays off all or several of your outstanding debts, particularly credit card debt. It means fewer monthly payments and lower interest rates. Consolidated loans are typically in the form of second mortgages or personal loans.

Borrowing from Friends and Family

Cash Advances

A cash advance is a short-term loan against your credit card. Instead of using the credit card to make a purchase or pay for a service, you bring it to a bank or ATM and receive cash to be used for whatever purpose you need. Cash advances also are available by writing a check to payday lenders.

Home Equity Loans

If you have equity in your home – the house is worth more than you owe on it – you can use that equity to help pay for big projects. Home equity loans are good for renovating the house, consolidating credit card debt, paying off student loans and many other worthwhile projects.

Home equity loans and home equity lines of credit (HELOCs) use the borrower’s home as a source of collateral so interest rates are considerably lower than credit cards. The major difference between the two is that a home equity loan has a fixed interest rate and regular monthly payments are expected, while a HELOC has variable rates and offers a flexible payment schedule. Home equity loans and HELOCs are used for things like home renovations, credit card debt consolidation, major medical bills. education expenses and retirement income supplements. They must be repaid in full if the home is sold.

Whenever you decide to borrow money – whether it is to pay the bills or buy a luxury item – make sure you understand the agreement fully. Know what type of loan you’re receiving and whether it is tied to any of your belongings.

Also, familiarize yourself with your repayment terms: what your monthly obligation will be, how long you have to repay the loan and the consequences of missing a payment. If any part of the agreement is unclear to you, don’t hesitate to ask for clarifications or adjustments.