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Different Types of Loans

A loan is a financial instrument, specifically a debt instrument, wherein the lender provides money to the borrower, which the borrower must pay back at agreed time and with agreed interest. There are different types of loans available for those who want to start a business and for personal use. Knowing the right type of loan to get can make a difference in their approval and in the how they can meet the specific purpose of the borrower. Some of the most common types of loans are business loans, SBA loan, home equity loan and auto loan.

Business loans are generally classified into short term loans and long term loans. Short term loan matures in one year or in several months, depending on the loan. Businesses usually apply for this type of loan when they need immediate cash, such as for manufacturing additional products for the Christmas season. Long term loans mature in several years. Businesses get this type of loan for major expenses, such as when purchasing land. Businesses can also apply for SBA loan. SBA loans are partially guaranteed by the government, specifically the US Small Business Administration. By guaranteeing the loan, lenders are encourage to provide loans to small businesses which are generally considered high risk as they are not yet fully established. SBA loans are generally long term.

Home equity loan on the other hand is the type of loan wherein homeowners draw on the equity in their home to borrow money from financial institutions. There are two types of home equity loans, the fixed rate loan and the home equity line of credit (HELOC). Fixed rates offer lump sum to the homeowner. This must be paid over a period of time and at specific interest rate. HELOC provides the borrower a credit limit which he can withdraw from. This is generally paid on a monthly basis.

Auto loans or car financing is the type of loan wherein the buyer enters into an agreement with the car dealer to pay the car over a period of time with interest. The buyer can get the loan from the dealer or from financial institutions, such as a bank. The car is used as the collateral.

Loans can also be categorized into secured or unsecured loan. Secured loan is guaranteed by collateral while unsecured loan has no collateral. The interest rates vary according to the type of loan. In unsecured loans the interest rate is generally higher.



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