Loans (MANAGING MONEY IS AN EDUCATION)
There are many types of loans within the world of finance where money is made available for others with a need, and who, in return, must pay interest for the privilege of being allowed to borrow money.
One of the ironic things is people quite often look for ways to save money and a lot of us also look for methods on how to get money but when money is scarce the tendency is to look for ways on how to save money.
It can be very difficult managing money, especially when there is never enough of it to help pay all the household bills and that is why it is always a good idea to have a financial advisor to help keep things under control so we do not fall into debt that can quite quickly get out of control.
Just so we are on the same page, we need to understand that a loan is in actual effect a debt.
Such debts are given by either an individual person, or financial institution to another individual or other party.
Loans Are Never Cheap
By and large, loans are given at a cost, which is more commonly known as interest and it is this profit which motivates the money lender to agree to offer loans.
One of the most fundamental assignments of a financial establishment is to provide loans and other financial services to its customers be they private or business related.
As most of us are aware, there are many types of different loans, but unfortunately not everyone understands the difference between the types of loans that are available.
A very good example of this is when people are in the market for their very first credit card. They are not fully aware of what type of card they should have, and quite often they choose the card that seems to offer the best rewards without too much speculation about the potential consequences further down the road. Or they accept the first card that is offered to them, without fully understanding how to best use the credit in a mature manner.
Here we will cover a few of the different types of financial loan that are available with a short description for each one.
Loan Types –
The amount of money lent to a borrower as an unsecured loan is done so by the lender, on the basis of the borrower’s good standing.
The borrower does not have to offer any collateral as a guarantee of being able to repay a loan, should he, or she, perhaps default on the repayment.
These types of financial loans come in various manifestations and a few example are, but not limited to:
- personal loan
- credit facility, (line of credit)
- credit card debt
- bank overdraft
Interest rates apply to all kinds of loans, and they can fluctuate according to what was agreed between the borrower and the lender.
Before entering into any loan, it is always in your best interest to do your due diligence and check the current laws and statures in your country.
In the event of a breach in agreement, a lender would have to take legal action against a borrower in order to retrieve his money, so it is should be no surprise to learn that the interest rates against an unsecured loans generally higher than those of a secure loan.
As opposed to an unsecured loan, a secured loan is one where a borrower offers a lender something of value as a guarantee that he, or she, will repay the borrowed amount in full, with all incurred costs, including interest.
In the event of a breach in the agreement, where the lender fails to complete the agreement any and all items of value that were offered as indemnity could be sold by the lender so the full cost of the loan could be retrieved.
In short, a conventional loan can be somewhat misleading to the uninitiated because it is more correctly a so called conventional mortgage.
These loans, or mortgages, are available in the US to persons with a credit score that is rated good to excellent. The federal government does not offer insurance for these type of loans, which are offered by banks, who have strict rules as to who qualifies for a conventional mortgage.
As with most mortgages and loans, a borrower’s credit score is a determining factor as to whether such a loan is available and at what rate of interest.
Besides the fact that this is a short term loan, a demand loan, also known as a call loan and/or a broker loan, is one used between businesses when capital is needed on a short term basis.
Such a loan is given to a brokerage company and the lender can insist a demand loan be repaid in full without notice. Hence, the name.
A concessional loan, also known as ‘concessional funding’ and the term ‘soft financing’ is a loan given by governments and multinational banks alike to developing nations. As the name implies, generous concessions are given – in the form of very low interest and terms that can be considered as very lenient.
A subsidized loan is a student loan which provides several financial benefits to someone attending an educational facility. These could be:
- low interest rates.
- government paid interest, (while the student is at school, college, or university).
- favorable period of grace following graduation.
This category of loan helps ease financial difficulties under education.
It is worth mentioning here that not all loans are beneficial to a borrower, apart from the fact that the borrower can get access to quick, ready cash.
In most cases, these type of loans offer just temporary relief from possible financial problems that have the potential to get worse, because of the nature of these loans.
FHA loan –
Home owners and home buyers are always pleased to be accepted for a FHA loan.
FHA is an abbreviation for the Federal Housing Administration who are said to be the biggest residential mortgage insurance company on the planet.
They offer and supply expertise and loans covering several niches within the financial sector.
Part of what the FHA does is to help people get the amount of loans they want if they qualify for them and also help borrowers lessen their risks by issuing loans.
Some of the things they offer help with are:
- refinance loans
- purchase loans
- mortgage insurance
- Jumbo loans
- 203k mortgage loans, (regular and streamlined).
Not everyone qualifies for this type of a loan because the lowest credit score applicable to lenders is one that reads 500.
The association does recommend people who have previously experienced negative issues as far as their credit score is concerned, to enrol in a “consumer credit counseling program” that could help them against being refused an FHA loan.
The administration may bend these rules a little if they can see a potential borrower has not been able to build a suitable credit history because of mitigating circumstances, providing of course the person, or persons, concerned meet other criteria.
One great attraction to potential borrowers is the fact that they are only required to have a 3.5% deposit against the cost of their house purchase, but the downside is that there is a limit on these type of loans.
It can be a little misleading when talking about FHA loans, because the fact of the matter is that the FHA is not a money lender in the true sense of the word, they are insurers.
Borrowers, or potential FHA clients, must obtain their house purchase loan via a financial institution that is FHA approved.
Costs and interest rates for the same type of FHA loan may vary between various mortgage brokers and lenders.
As regards FHA loans an insurance premium is required and this is known as a “two part mortgage insurance”.
The first part is commonly known as the upfront premium, because payment for this is due as soon as the client receives his loan.
The second part is referred to as the “annual premium” and this is paid each month. The amount is reflected against the size of a loan, the LTV, (also known as the “loan to value” ratio), and loan’s length.
The annual premiums can change due to factors that are outside the scope of this article, but they are extremely favorable for the typical 15 year loan and 30 year loan plans.
It is suffice to say that annual premiums 10% or larger down payment on a 15 year loan is less the annual premium for a down payment of less than 10% for the same type of loan.
Likewise, on a 30 year loan the annual premium is less for loan with a down payment of 5% – or more – than it is for a less than 5% down-payment for a loan with the same time frame.
Another incentive for people to seek an FHA loan is the fact that the association is able to offer its clients extra funding should they wish to repair or modernize their new home.
This kind of loan goes by the name of 203k and the great thing about this loan is the fact that it is not set against existing appraisal. Instead the 203k loan is based on the estimated property value once improvements, and even maintenance or minor repairs have been completed.
This particular version of the more commonly known 203k loan is referred to as the “streamlined 203k” loan, because it is offered for reasons stated, whereas the standard 203k is basically used for structural work that covers major repairs and, or additions.
Other types of FHA loans that are available are:
- Fixed Rate FHA loan
- Adjustable rate Mortgage, (ARM)
- FHA Secure Refinance Loan
- FHA Reverse Mortgage
- Energy Efficient Mortgage
- Graduated Payment Mortgage
- Growing Equity Mortgage
- FHA Loans for Condominiums
There is no doubt about it, the FHA is very empathic when it comes to customer care.
It is not unusual for people who have FHA insured loans to be offered temporary financial relief, in the form of reduced payments in the event of a sudden financial difficulty. Even the time frame for repayments could be extended, or perhaps a suspension on a part of the remaining balance owed.
Here are a few loans you should steer clear of and the reasons why:
If a resident in America it is recommended to check if the state you live in has its own laws concerning payday loans and if so, you need to establish what your rights are.
The reasons why you should give this type of loan a wide berth are several, but the mains ones are once you repay this type of loan you are immediately setting yourself up to repeat the process.
What happens is you give the moneylender a signed check for one hundred percent of the amount you wish to borrow. In return you get the cash, minus the fees incurred for borrowing the money.
If you manage to repay the full amount on your next pay day you get your check back.
Should you not be able to make the repayment, the debt can be carried over until the next payday, but the fees charged will escalate to a level that is consistently higher than the first fee.
It is far too easy to get into serious financial trouble with this type of loan, so be warned.
The CFPB, (Consumer Financial Protection Bureau), have reported that the equivalent of 80% of payday loans are rolled-over in as little as two weeks. That is four of every five loans that prove payday loans equate to being a very steep spiral of debt.
Car Title loan
This type of loan is often used as a quick fix to a temporary financial problem.
It seems like an easy way to get cash, when short of the same, especially when you own a car.
The trouble with a car title loan is that a money lender will only loan you a small percentage of the full value of your ride.
Typically these loans are for a maximum of thirty days and they are coupled with a high interest rate.
The borrower gives the lender his car title, along with the extra set of keys.
Missing one payment on the agreed day could very well mean you lose ownership of a car that most probably would be worth many times more than what you borrowed.
Finance company loan
It has been reported that it is not unknown for some finance companies to be somewhat conservative as far as the truth is concerned with what type of loan they offer to their clients.
Borrowers have been led to believe that they obtained an unsecured loan, when in actual fact the loan was really a secured loan.
The details get hidden in the jungle of fine print in the terms and conditions and, or the agreement and some financial establishments have been found to push borrowers to loan more than they originally asked to borrow, so that they risk defaulting on the agreement.
Tax refund loan
Also known as a “tax anticipation loan” and an “instant refund loan” this is a loan that generally valid for a maximum of ten days only and for no more than five thousand dollars, ($5,000).
Coupled with the interest rates being very high, and the fact that the lender must be paid a fee in advance, plus other costs it is the lender who receives your tax return from the IRS, because all monies repaid are deposited into an account that is setup and controlled by the lender.
Once the moneylender takes his cut, you get what pittance remains.
The costs involved in this type of transaction are too expensive when you consider the timeframe and expenses.
Credit card cash loan
This particular loan should only be used when there is definitely no other way to borrow money, and also only if there are no other options open to you.
Using your credit card to get cash is very easy, if you haven’t maxed your card out. that is. It certainly is easy and convenient to use your plastic to get cash.
But drawing cash against your credit card is a debt, no matter what way you look at it and the advantages of ease and convenience come at a hefty price in the form of high interests and high fees.
Fee free credit with zero interest sounds very enticing. But the downside is this type of offer is made to people who are perhaps vulnerable because they are looking for excitement and also the chance to win a lot of money.
Furthermore, the loans must be used for gambling, and nothing else.
Taking advantage of this type of loan almost guarantees you will lose more than the shirt on your back.
If you fail to fulfill your obligations with a cosigner loan you will lose more than your self-respect, along with whatever collateral you offered against the loan.
But you will also lose the respect, trust and friendship of your co-signer, if your
creditor has to claim your debt from them.
A debtor only receives about a thousand dollars, ($1,000), to which is attached a very high level of interest.
This kind of loan can be extended to 6 or even 12 months.
Borrowers unwittingly line themselves up for failure by agreeing to terms set up in loans of this nature.
Advance fee loan
This type of loan could cost you your upfront fee, because if you are not completely sure as to who it is you are dealing with a potential lender could take your cash and leave you wondering what happened.
Most people know how this kind of short term loan works. It carries a high rate of interest against the small percentage of money you borrow, against the full value of a piece of tangible property.
The majority of states allow a period of 3 months for this type of loan. At the end of the agreed period of a loan, your goods become the pawnshop’s property if you fail to repay the borrowed amount of cash borrowed and the incurred interest.
Asking your bank for an overdraft so you can make ends might seem like a good idea and generally banks come across as being very sympathetic to a client’s needs in such a situation.
But as soon as they agree terms and conditions with you, you get hit with a fee for the pleasure and then you get more fees until the overdraft has been paid back.
These fees escalate very fast and you really need to be alert and repay the overdraft as soon as possible.
No matter what your needs are, when it comes to borrowing money for whatever reason, always remember that banks, and other financial institutions that include money lenders of every kind are in business to make money, for themselves.
All loans carry the very real potential of grave risks to you and your future, and that includes your near and dear ones too, if you have a family, so be very careful when borrowing money. Because loans do have to be repaid with interest and if you fail to make a repayment it could be one of the worst things to ever happen to you.
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