It’s easy to take loan basics for granted once you’ve been baptized into the vast world of financial lending. I remember struggling with loan decisions as a young adult. These agreements took a great deal of time and effort to understand. Trying to figure out whether the loan terms were reasonable or some type of scam was even more challenging..
In an effort to save time and painful research, here is a very brief overview of some of the more common types of loans.
The temptation is to think of credit cards as a type of currency or transaction medium, like cash or a debit card. However, in reality, a credit card is as much a family loan as any.
For a credit card, there is usually a regular monthly billing period. So long as purchases are paid by the due date, the borrower will not need to pay interest. However, any remaining balance after the billing period is usually subject to high interest rates.
Those with good credit scores could see rates as low as 10 to 14 percent. Often, though, rates are much higher. Those with poor credit can expect rates as high as 25 percent.
Although credit cards can be terribly addicting to those who struggle with spending and making ends meet, they can also be very helpful. There are many reward cards options that offer cash, goods and travel miles for every dollar purchased through the card.
Other Things to Keep in Mind: Many credit cards also require an annual membership fee. These fees usually make the card unattractive for potential users. Most credit cards hit you with steep fees for late payments or going over the credit card limit. Cards may also change your payment terms suddenly. Some cards may jack up their interest rates if you make a late payment.
Grow up in a massive urban area and you may not realize that much of the countryside is left without public transit. For families living in most rural and suburban areas, a family vehicle is a must. Since cars are a big purchase, most families are going to need a car loan.
Car loans are very straightforward compared to other loans. You request an amount to purchase a car and pay monthly principal and interest for the loan. Interest rates often vary by credit history, car type and car age, but they usually range between 7 and 12 percent.
Other Things to Keep in Mind: Non-payment on your loan could lead to repossession (where the bank has the right to seize your car). You also cannot sell the vehicle until it is paid off.
Mortgages are the most common loan for families in America. They are the loans you obtain in order to buy a home. Since houses are a big purchase, mortgages have a variety of different features that can vary greatly from bank to bank. Since a mortgage could easily take up a whole article by itself, I want to cover just some very basic elements.
Traditional mortgages generally have terms of 15 or 30 years, and payments occur monthly. They tend to have low rates of interest because home values make them less risky for banks to lend. Your payment is likely to include interest, principle and other items in escrow like insurance and taxes. Mortgages also offer homeowners tax benefits since interest is deductible for itemized filers.
Other Things to Keep in Mind: Housing generally eats up about a third to half of the average family’s budget. This means you need to be careful when looking for the right loan. There are many loan products that might get you through closing and into a new home, but squeeze your budget with high interest payments.
You can see how common types of family loans can vary. If you are in the market, feel free to discover the available loan options. Now that you know what loans are available, make sure you look over your options carefully to avoid entering into an agreement that your finances cannot handle.