Bank loans are available in different shapes and sizes depending upon the purpose and the nature of loan applied for. Most common types of loans are variable rate, fixed rate, instalment, unsecured, secured convertible etc. Each type of loan has its own payment term and rate of interest. Understanding these matters will be helpful in finding out the most suitable loan for a particular need and for a particular person.
Types of loans
Finance is the most important aspect in everybody’s life and a person who is earning much money or who possesses much money as ancestral property is considered as the luckiest person. Others work hard every day thinking of improving their financial ability and becoming rich in life. Banks are these days playing a very crucial and fortifying role in everybody’s life by providing loans to meet the needs of everyday life. Most ordinary people and working class people are depending upon bank loans for meeting their various needs like buying a vehicle, constructing own house, starting of new business, studying professional courses etc.
Fixed rate loans
Fixed rate loans are the most common type of consumer loans. The basic peculiarity of this type of loans is that the interest to be paid for the loan amount is not altered during the repayment period and it remains the same till the loan amount is completely paid back and the account closed. Interest rate of this type of loans seems to be a little more than that of variable rate loans. The great advantage of this type of loan is that the rate of interest remains the same throughout the repayment period of mortgage loans except for the slight variations that may occur to keep the escrow balance high for paying the home owners insurance and the taxes.
Variable rate interest
In this type of variable interest rate the interest for a loan varies depending upon the market rate of interest or prime rate. In this type of interest the monthly amount to be repaid for a student loan or car loan may vary depending upon the interest decided for a particular period. This type of interest is usually lower than that of the interest rate for fixed interest loans. This interest rate is more suitable for first time home buyers or for those who have taken refinance loan. It is a common strategy adopted by many people to go for variable interest during the first few years of a house loan and then change to fixed interest type when the market seems to be going up.
An instalment loan is one in which the entire loan amount plus the interest is paid over a period of time ranging from six months to thirty months in equal monthly instalments. Most often home mortgage loans or auto loans are of instalment type of loans. This type of loans have specific terms like repayment period, rate of interest, monthly instalments, starting and ending date of loan period etc.
Secured loans are that type of loans the repayment of which is supported by collateral security like a house or a car. One good example of secured loan is home equity loan. If the borrower defaults continuously the bank has the right to take possession of the security which is the house, sell it in auction and use the amount received for closing the loan account. Auto loans, business loans, house loans etc are some examples of secured loans.
Unsecured loans are loans granted to individuals without insisting for any collateral security. These loans have very high interest rates depending upon the credit score of the borrower. A person with good credit score most often gets a lower rate of interest. Bank personal loans are a good example of unsecured loans.
Convertible type of loan
Convertible loans are those loans which can be converted one type to another type during the life span of a loan. A good example of convertible loans are home loans which starts as variable interest loans that is converted in the middle of the loan repayment period to fixed interest rate loans. Small business people start their business with businesses loans which are by convertible loans and subsequently changing it to fixed interest type loans.