Life is incomplete without credit. Whether you want to buy a house or a car, or even pay for your groceries, you need some kind of credit.
Credit instruments are divided into several categories. For simplification purposes- let’s focus on two major types of credits. The first type is called open-ended or revolving credit. Credit cards are the perfect example of this category. Here, your credit renews every month and it won’t end unless you explicitly want it to.
The second type of credit is close ended credit. It includes all kinds of loans like mortgages, car loans and even payday loans. They are credited to the applicant once and must be paid off at regular intervals along with interest.
Now, let’s learn about different types of loans.
They provide you a set limit to use every month. Credit cards usually come with a high rate of interest. Your limit of credit can be defined differently by different card providers.
You can have multiple credit cards at once. They are mostly used for making small everyday payments. You can buy consumer electronics etc. or even make small investments on this card.
Homes are big buys and not all people have the money to pay upfront for these pricey assets. This is why banks disburse these large loans to people with a good credit score. People become homeowners and keep paying the bank.
Every month a set amount of principal + interest goes to the bank until the entire loan is written off. If you fail to pay this loan, you risk foreclosure. Mortgages have one of the lowest interest rates in the market.
Loans extended by banks and other lenders for buying a vehicle are known as auto loans. They work exactly like mortgage loans. As you cannot pay for a vehicle upfront, you loan the amount from a lender and keep paying the principal + interest every month till the amount is written off completely.
In case you fail to make payments, your vehicle will be confiscated by the lender. Many car dealerships offer these loans directly. They are very convenient but costlier than other lenders.
These are small but high interest-bearing loans that are infamous for making many people grow deeper in debt. Most people are unable to make ends meet with their income. They could eventually run out of money before the end of the month. If an emergency arises, they move to a payday loan company.
A payday loan is for people who guarantee their paycheck to the lender for making payments. This means that the lender will cash your check as soon as it arrives next month. They mostly bear very high rates of interest.
There are several other types of loans like student loans, personal loans, loans against securities, loans against deposits, cash advances and borrowings from family and friends. Most of them have a similar payback structure.
The kind of loan you should choose will depend on your needs, you are paying capacity and your credit score.