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When
you need to borrow money, you have a lot of options. Here is a quick guide
to what some of those lending terms mean and what types of credit instruments
are best for your need. Secured Loans vs. Unsecured Loans Basically, there are two types of loans: secured loans and unsecured loans. Secured loans are loans in which you pledge some sort of collateral. The bank may repossess the collateral if you do not repay the loan according to the terms you agreed to when you took out the loan. Unsecured loans are loans which do not require any collateral. You borrow money on the strength of your good credit and ability to repay alone. Revolving vs. Installment Loans Revolving and installment describe the amount of time you have to pay back a loan. With a revolving loan, you have access to a continuous source of credit, up to your credit limit. You repay only the amount of the credit you use, plus interest on the unpaid amount. You may re-borrow the principal you've repaid. So the loan could remain "open" for years. With an installment loan, you pay an agreed amount, which includes principal and interest, every month. Each payment reduces the balance of the loan until it is paid off. There is a fixed ending date, known as the term of the loan. Fixed vs. Adjustable Interest Rate Loans Fixed interest is just that. You and the bank agree to a certain interest rate and it remains constant throughout the term of the loan. Fixed interest rates give you the stability of always knowing what your payment will be, so you can budget accordingly. Adjustable or variable rate interest fluctuates. Usually it is pegged to the Prime Rate - the interest the U.S. Treasury charges to its best borrowers. When the Prime Rate is high, such as during a period of inflation, you pay more. When the Prime Rate is low, such as when the government is trying to stimulate the economy during a recession, you save on interest. If you need to borrow during a period of high interest, your payments will drop once the Prime Rate drops. Auto Loans: A secured loan in which the collateral is the vehicle you purchase.
Our convenient Loan Indicator Chart shows you what types of loans may be best for you based on the purpose of your loan.
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PURPOSE OF LOAN | LOAN OPTIONS |
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Automobile Truck, Minivan | Auto Loan, Home Equity Loan, Home Equity Line of Credit |
Boat | Secured Personal Loan, Home Equity Loan, Home Equity Line of Credit |
Cash Reserve | Credit Card, Home Equity Line of Credit |
Clothing, Books, Toys, Other Small Purchases | Credit Card |
College Education | Student Loan, Home Equity Loan, Home Equity Line of Credit |
Day-to-Day Purchases | Credit Card |
Debt Consolidation | Unsecured Personal Loan, Home Equity Loan, Home Equity Line of Credit |
Emergencies | Credit Card, Personal Loan, Home Equity Line of Credit |
Furniture and Appliances | Credit Card, Personal Loan, Home Equity Loan, Home Equity Line of Credit |
Gasoline | Credit Card |
Gifts | Credit Card, Personal Loan |
Home Office Equipment | Credit Card, Personal Loan, Home Equity Loan, Home Equity Line of Credit |
Home Remodeling | Credit Card, Personal Loan, Home Equity Loan, Home Equity Line of Credit, Home Improvement Loan |
Hospital Bills | Credit Card, Personal Loan, Home Equity Loan, Home Equity Line of Credit |
Meals and Entertainment | Credit Card |
New Home | Mortgage Loan |
Overdraft Protection | Personal Line of Credit |
Personal Computer | Credit Card, Personal Loan, Home Equity Line of Credit |
Refinancing Your Home | Mortgage Loan |
Recreational Vehicle | Secured Personal Loan, Home Equity Loan, Home Equity Line of Credit |
Starting A Business | Home Equity Loan, Home Equity Line of Credit |
Wedding, or Other Important Occasion | Credit Card, Personal Loan, Home Equity Loan, Home Equity Line of Credit |
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