Loan Types. Credit Features Borrowing Lending Advances Mortgages

Credit or Loan Types Features and Major Different Ways of Lending or Borrowing

Money is the vital component for any business venture, after all you need funds for short term and long term dealings. If you have any plans to start a business, no matter what scale, it is not possible for you to arrange the entire funds. Hence, you seek the aid of loans and advances. Loans are basically debts that are offered by any financial institutions for a specific span of time. On the other hand, Advances are the funds offered by the banks to the business ventures in order to cater to the capital demands. This needs to be paid back within a year’s time.



You have to repay the amount of loan along with the interest either in installments or in a lump sum amount. You can choose either the term loan, which needs to be repaid after 3 years or a demand loan that has to be paid within 3 years. The advances also need to be repaid along side the interest within a year’s time. Whenever we talk about the loans and advances, they are conceived as the same. But when you minutely explore the two terms and study about them, you will find that there are so many differences between the two.



What do you know about loans?


A loan is the amount that is lent to the borrower for a particular reason for a specific time frame. The purposes include machinery purchase, capital needs and the construction of the building. Banks and financial institutions grant loans and act as the lender. As a borrower, you need to repay the loan amount within a deadline provided. Before lending the loans, the banks or financial institutions will check the borrower’s financial stability, the potential to repay, credibility and the credit report of the borrower.



Categorization of loans


A loan can be categorized in the given below classes:
On the ground of security, we have:

1.       Secured loan
  2.       Unsecured loan



There are at least three types of loans in the USA based on the repayment

  1.     Installment loan
  2.      ime loan
  3.      Demand loan


Based on the purpose of the loan approval

  1.        Education loan 
  2.        Car loan 
  3.        Home loan 
  4.        Commercial loan 
  5.        Industrial loan

What do you know about the Advances in the United States of America?

According to general global scenario when any company or a business venture has the short term fund or financial requirement, the advances are offered by the banks. It is basically a credit facility that has to be repaid within a year. The terms and conditions have been issued and stipulated by the Fed Reserve, similarly by Banking regulators in their respective countries like Bank of Japan, Reserve Bank of India, and so on. There are securities against whom the advances are provided. They include:



  •          Guarantees
  •          Collateral Security
  •          Primary Security

Some popular types of bank advances in the US include at least:
  •          Bills Purchased
  •          Cash Credit
  •          Overdraft
  •          Short term loans


What are the key differences between loans and advances?

 
Let us find out some of the major differences between loans and advances:
  •           The loans are a form of debt, while advances are credit facility offered by the banks.
  •           The loans are provided for a long term. On the other hand, the advances are provided for a short period of time.
  •           Loans have quite a number of legal formalities, but the advances have less complicated legal formalities.
  •           In terms of the security, loans may or may not be as secured as expected. But, advances are secured via guarantor or an asset.

From the explanation, it is quite sure that loans and the advances are two different things.

Understand different loans and credits

 If you explore the loan contracts in more detail, you will find that it comes in varying forms with different terms, ranging from the promises between family members and friends to complicated and complex loans in the form of mortgages, student loans, payday loans, auto loans and so on.
Despite the type and form, you will find that every loan with the repayment conditions are governed by the State and the Federal guidelines. This is done in order to guard and protect the consumers from the offensive practices, especially, the high interest rates. Additionally, it is also essential to ensure that the length of the loan and the default terms and conditions are clearly mentioned so that there are no confusions.

When there is a default, the outstanding debt’s collection terms and the costs associated must be mentioned clearly in details. When you demand for money for any important item or in order to make your life easier, it is better that you understand the different types of credits and loans that you can access and the terms and conditions that you need to deal with. 





What are the types of credit that we need to know?

When you look at the consumer credit categories, there are two types. They include:

1.       Open-end credit
  2.       Closed-end credit

The open-end credit, is also known as the revolving credit, can be used multiple times for purchases you want to make. The repayment is monthly basis, though you are exempted from paying the complete amount due every month. The credit cards, home equity loans and the home equity lines of credit (HELOC) are the common types of open-end credit.

You use the credit cards on a regular basis, on the expenses like clothing, food, transportation and even for home repairs. There is an interest charge that is levied on the card, and it is not necessary to pay it in full. Furthermore, the interest rates charged is 15% on an average, but can be as high as 30% or even 0%. This all depends on your credit score and your payment history.

The closes-end credit, also known as installment loans are used for financing any specific purpose for a stipulated frame of time. As a consumer, you are asked to abide by certain regular payment schedules, which is preferably monthly. The monthly charges include the interest charges as well till the principal amount is fully paid. 

Depending on the consumer’s credit score and the lender, the interest rate varies. In case, there is a default on the loan on the part of the consumer, the lending institution has the full authority to completely seize or take away the property of the consumer. Some of the examples of the close-end credit are car loans, appliance loans, mortgages, payday loans etc. 

The different types of loans available

Every type of loan has a specific reason of purpose or use. Hence, they vary with respect to the time period, due payments, interest interest and several other factors. Let us have a look at some of the most common and popular types of loans that are available.

Mortgages

When you want to purchase a home, but cannot make the payment right then, the bank provides the mortgages, which are basically loans. A mortgage loan is linked to your home, failing of repayment means you are risking your home. It is said that the mortgages have the lowest interest rates when compared with all other types of loans that are available. 

Student loans

In case, you are a student and want to study further, but lack the funds, the banks offer the student loans. This helps to cover the cost of your higher education. There are two primary types of student loans available. They are:

  1.        Federal student loans 
  2.        Private student loans


When you compare both the student loans, it is found that the Federal loan is way better than the private student loans. This is because the former comes with a lower interest rate, which is helpful for the students and their families when repaying the loans. Moreover, the Federal student loans have friendly and hassle free repayment terms.
  

Personal Loans

When you want some funds to be used for your personal expenses without any specific purpose, personal loans are considered as the best option. The personal loan is quite an appealing one for all those individuals who have outstanding debts, especially associated with the credit card debts. Like any other loans available, the approval of the personal loan also depends on your credit history and your potential to repay within the specific term.
 

Auto Loans

 Similar to the mortgages, the auto loans are linked to your property. You can buy your dream car via the auto loan. But, in case, you miss out paying the installment, your car is at risk to get seized by the money lending institute. Banks and the car dealership can offer you with such loans. But, it is suggested to opt for the banks, as the interest rates are lower as compared to the car dealers.
 

Small Business Loans - SME Loan

 In case, you are planning to start up a business or want to expand your present business, you can seek the aid of the small business loans. The SBA or the US Small Business Administration is the best source for the small business loans. Depending on the type and the demands of your business, you can get hold of varying loan options and choose the one that suits your business the best.


Veteran Loans

 If you are a veteran, or belong from one of such family, the Department of Veterans Affairs (VA) offers with money lending programs. When you are applying for a VA home loan, the fund will not reach you from the administration directly. It is the VA that acts as the co-signer and backs you for the loan of a higher amount, but with much lower interest rates.

 Consolidated Loans

 The consolidated loans are more  or less similar to the personal loans or the mortgages. When you have many outstanding debts, especially associated with the credit card debts, the consolidated loans can make things easier for you. With such a loan, you can clear all your debts. With a few monthly installments and low interest rates.

Payday Loans

Payday loans have been specially designed for those individuals who repeatedly borrows money. Basically, the loans are borrowed, to cover the gap from one paycheck to the other. The loans have a very high interest rate and have short term repay tenure. The loan is not recommended by the government, because it will cost really high for the consumers.
 

Borrowing money from family members and friends

 When you are borrowing money from family members and friends, it is considered as an informal loan. There are several people who prefer borrowing money in such an informal manner. But, it is always better to sign a promissory note between both the parties so that the relationship between you and your loved ones are not strained. 


Borrowing funds from the retirement and life insurance

 If you have accounts with retirement funds or life insurance, you are eligible for borrowing money. This loan option seems to be easier and less hassle free. It is because you are borrowing from your own account. Hence, the repayment is so easy and simple. When you fail to repay the amount borrowed, you will have to face extreme tax charges.





Cash Advances 

This is a short term loan that is provided against your credit card. With the help of the cash advances, you don’t have to use the credit card in order to make payment or shop. You can bring the cash advances to any ATM or bank and get cash instead and spend it the way you like it. In fact, the cash advances can also be used by writing a check to the payday lenders.




Home equity loans

 


When you have an equity in your home, you might not even realize that the worth of the house is more than you actually owe it. You can make use of the equity of the home in order to make payments for any other big dreams. Home equity loans are considered good for the following:

  •          Credit card debt consolidation
  •          House renovating
  •          Paying huge medical bills
  •          Student loan repayment
  •          Act as a retirement income supplement

You can basically use the home equity loans for any other projects that are underway.
Since you are a borrower, your home is used as a source of collateral against the home equity loans. The best part is that you will find that the interest rates are quite low as compared to the credit cards. In case, you have any plans to sell the house in the future, make sure that the home equity loans are repaid completely.


You must understand the terms of the loans

 No matter what is the purpose of you borrowing the money, either to make bill payments or buy luxury items like a home or a car, you have to ensure that understand the loan agreements completely. Moreover, you must have the knowledge with the type of loan you will receive and what are the risks involved in case, there is any failure of repayment.

It is also important that get to know about the repayment terms. For instance, the amount of repayment that you need to pay every month, the tenure of the repayment and the effects of missing repayments. In case, you lack the understanding, you should never hesitate to clarify your doubts about the agreements.




The varying types of advances/ loan types provided by the commercial banks

 

 

 

Demand Loan


In case of a demand loan account, the full amount is paid to the person who owes the creditor. It is paid either in the form of a cash or via the transfer of fun to the current or savings account. There is no succeeding debit allowed, with an exception to the interest rate cost, the insurance costs, security expenses and incidental charges.
The demand character of the loan doesn’t get affected in any way when the repayment is offered via the installments. In respect to the repay installments, there are strict stipulations mentioned. For instance, if any, of the installment is unpaid, the complete loan amount will be due. There is an interest rate that is charged on the debit balance. In such a situation, you will not be issued with any cheque book. There is a security against the demand loan in the form of shares, fixed deposit receipts, life insurance policies, valuable goods, government paper etc.


Overdraft

 As an unsteady account, the overdraft balance can be in the credit or in the debit account. You will be allowed with an overdraft account, only if you have a current account. It is because of the overdraft that allows you to draw the amount that is beyond the stipulated limit. In order to make it more clear, let us consider an example. 

Suppose there is a credit balance of around US$ 890 in your current account, and the overdraft stipulated limit is approximately around US$1113. You have the option of withdrawing a cheque amount of around US$2003. You will face absolutely no limitation unlike in case of the case, where drawing money more than once is restricted. 

You get the option of drawing and repaying as many times you wish to, until the total debit balance doesn’t exceed the stipulated limit amount at any time. This whole perspective is a satisfactory and contended option from the viewpoint of a customer. As a customer, you won’t have to fear that once deposited the amount cannot be withdrawn more than once, unlike in a loan account. 

The overdraft is provided against tangible security in the form of:
  •          Life insurance policies
  •          Fixed deposit receipts
  •          Government papers
  •          Shares

When you have an overdraft account, a cheque book will be issued.


Term Loan


A term loan is granted to a customer for a fixed time period, that can exceed up to three years or even more. The repayable term is based on the stipulated schedule, that you have to abide by as a customer. The period for the term loan can extend up to 10 years, and even up to twenty years in certain cases.

 In order to get a term loan granted, you have to showcase the purpose of the requirement as it is provided for fixed fun demands. For example, building and land investment, investment in equipment and tools, or investing in factories and plants. Setting up a new project or expanding a factory can be granted a term loan as well.


Cash Credit


It is basically a drawing account that is granted against the credit cards. The cash credit functions more or less similarly like the current account in which a limit on the overdraft has been stipulated. As a customer, you can enjoy a massive advantage from the cash credit. Within the given limit, you have the right to operate your account as and when required. Moreover, you also get the amazing opportunity to save the interest rate charge as you get the chance to reduce the debit balance whenever you are in the position to do so.

As a borrower of the cash credit, you also have the option of offering with the substitute securities in a timely manner, keeping in compliance with the terms and the conditions and as per your requirements and demands. The cash credits are usually granted against securities like raw materials, finished good or the stocks that are in process and against book debts. Whenever there is an excellent turnover without any negative effects, a cash credit limit can be initiated that can be continued for years to come, with necessary periodical evaluations.


Bills Discounted

Whenever there are usance bills that mature within three months are often given discounts and rebates by the banks for certain customers. Let us take an example to understand even better. Suppose you have a bill worth US$223 which is due in 90 days. Because the bank provides a discount, you will receive the same by at least 20% per year. The borrower gets paid approximately US$211, its present value. The full amount can be collected once the maturity is complete. The distinction between the present value and the bill amount is the earning of the banker for the time period for which the bill will operate. Such a case of income is referred as the discount in banking.


Bills purchased

 Clean or documentary bills are often bought from the approved customers who are set with stipulated and sanctioned limits. When we are considering the case of a documentary bill, there are drafts made that can be associated with the paperwork of title to different goods and items like BOL or the Bills of Landing, railway receipts and so on. Before the limit is granted, the worthiness of the credit of the fund drawee needs to be evaluated. The financial stability of the drawees of the bills are verified very strict, especially the bills are drawn repeatedly and the amount is large.

The term “bills purchased” indicates that the bank is the owner/purchaser of such bills. In the majority of the cases, it has been found that the bank holds on the bills as a measure of security for the advanced granted. Additionally, under the rules and regulations, the bank has the right to move against the parties liable on the bills.

 What do you understand by Cash Advance?

 A Cash Advance is issued by a bank or any financial institution as a short term loan. The Cash Advance enables the credit card holders to withdraw a certain amount of cash amount. Such a type of funding has the disadvantage of high interest rates, but is still appealing to the borrowers. The reason behind the popularity and approval of a high interest rate cash advance is the quick funding option and the faster approval from the bank when compared to any other types of loans or funds granted by the bank.




What are the different types or categories of Cash Advances?

If you explore the domain of cash advances, you will come across a wide variety of them. But the majority of them are know have a very high interest rates and fees. Let us have a look at some of the popular types one by one briefly.
  

Credit card cash advances

 Perhaps the most popular and widespread type of cash advances is borrowing via a credit card. You can withdraw the amount of money from the ATM, which particularly depends on the credit card company. In fact, you can even cash out the money from the bank from the cheque that has been deposited. Hence, the name credit card cash advances.

This type of cash advance has a steep interest rate, which is higher that the regular purchase rates. On an average you will have to pay around 23.53%, which is around 8.54% higher than your average APR for the purchases you make. The worst part is that there is no grace period that gives you the time frame to stabilize before the interest rate starts to rise. The interest starts to rise immediately at a steep pace.

The credit card cash advances also come with a fee, which is either calculated as the percentage of the advanced amount or the flat rate. When you are using the ATM in order to get access to the cash, you will be charged with a small percentage of the fee (usage fee). Apart from all such fees and rates, the credit card cash advances also include an independent balance from the credit purchases you make. You have the option of applying the monthly payments to any of the balances.

In case, you are making the payment of the minimal due amount, the issuer of the car is allowed to apply it to the balance keeping the interest rate low, as per the Federal Law. This is the rate compatible with the purchases. Hence, the balance might increase the interest rate for the coming few months. If you minutely research, you will find that in the majority of the cases, the credit card cash advances don’t have any low interest rate offers. But the plus side is that it is very easy and fast to acquire.
 

Direct Deposit Advances

 On the ground of your direct deposits, the bank will advance an amount to you. When the deposit is finally granted and delivered, the bank recovers the loan amount and the related fees. In almost every case, the repayment to be made for the cash advance is withdrawn out of your account, before any automatic payment, charged or cheques are allowed to operate. In 2014, there were numerous complaints regarding the fee structure associated with the cash advances. This led to the discontinuation of the direct deposit advances by some of the major banks and alternative lending institutions.

What are Merchant cash advances?

 The merchant cash advance is a type of loan that is granted by the merchants or the companies from the banks and any other alternative money lending sources. Usually, the business ventures or organizations that don’t have the perfect credit make use of the cash advances in order to fund or finance their business activities.
In certain cases, the merchant cash advances are also used in order to make the payment for future credit card receipts. There is a part of the fund that the merchant receives from the sales in the online account as well. Instead of making use of the credit score of the business venture or the organization, the alternative financial institutions evaluate the credit worthiness potential by considering several aspects. One such element is the amount of the money that the merchant receives via the online accounts, for instance, PayPal. 




What are Payday loans?


If you are aware of the consumer lending terminology, the phrase “cash advance” can also be used to denote to the payday loans. The payday loans are issued or granted by the special category of the payday lending institutions. The amount of the loan can range from US$ 50 to US$ 1000. But, unfortunately, they are accompanied by a fee, which varies from $15 to $100 per borrowed loan. Moreover, the interest rate can exceed almost 100%.

Instead of considering the credit score of the borrower, the lending institution will consider the grant of the loan on the grounds of the local state laws and regulations and also on the size of the paycheck of the borrower. When the loan is approved, the lender will provide the borrower with cash. The whole transaction can also take place online, where the lender will initiate an electronic deposit of the amount to the savings or current account of the borrower.

The payday loans are basically short term, in the literal sense. The borrower have to repay the loan amount the very next payday. But, there is a chance of extending the period of the loan, and in such a situation, an extra interest rate will be charged. There are several applicants of the payday loan who are ready to make the additional interest rate charge and extend the loan term period. As per the survey reports go of the Consumer Financial Protection Bureau (CFPB), around 80% of the payday loans are rolled over within a month’s time of the previous loan. 

The best part about the payday loan is that is really quick and fast. In order to get the loan, you have to write and submit a postdated cheque to the payday lending institutions for the amount of money that you want to borrow, which includes the fees and other additional charges if any. The lender will instantly issue or grant the amount of money that the applicant wants to borrow. But he/she needs to wait to turn the cheque into cash until the payday comes. 

In the present era of the digital transactions, the lenders ensure that the borrowers of payday loans sign an agreement for the automatic repayment from their bank accounts. When you apply for the payday loans, you will be asked to provide with your proof of income and some personal identification details. There are several employers who offer the payday loans as a service to their employees. The terms and the conditions vary, but in the majority of the cases, there are no interest rates, fees or additional charges are filed.


Can the Cash Advances negatively affect your credit score?

This is a question that pops in the mind of so many people out there who look out for borrowing cash advances from the banks and other alternative lending institutions. The good news is that the cash advances will not show any kind of direct impact on your credit score. Having a good credit score is very important, especially when you look out for loans for buying a home or car. But the cash advances might have some indirect effects in several ways.



When you withdraw the advances via your credit card, it will undeniably increase your outstanding balance. This in return will bring an increase in your credit utilization ration. This is the tool that measures and calculates your credit score. Let us take an example to understand the concept of the credit utilization ration. 

Suppose you owe an amount of US$ 500 on a US$ 1500 limit card. This makes your credit utilization ration 30%. In case, you withdraw an amount of US$ 300 in advance on the card, the balance goes to $800, making the credit utilization ration to 53%. Whenever the credit utilization rates are high, it is an indication that there is a risk involved with the credits. Henceforth, your credit score gets affected badly and your utilization ratio goes beyond 40%.

It goes without saying that the cash advances carry a steep interest rate, which negatively influences your potential to make the monthly charges efficiently. This can be one of the prime reasons for impacting your credit card score. When the cash advances exceed your credit card’s limit, your credit score will be hurt. This means that even after you pay the balance, the credit report will display the highest balance. The lenders will find out that you were once or the number of times you were over the limit of the credit, affecting your potential to get a new credit card any time sooner.
 

The advantages of cash advances

 If you are someone who has an urgent need for money or has a restricted resource for getting the fund,. A credit card cash advance can be an excellent solution. This holds good only for those people who have the clear intention and the potential to repay the money in a short interval of time period. The credit card cash advances are often considered a better option than the payday loan, especially for the flexibility of the former.
Let us find out the situations or conditions when the cash advances can be considered an excellent option to consider.

·         Paying Credit Card Bills


Credit card debts cannot be ignored. As the days pass by, the interest rates and the other additional charges soar high. In fact, your credit score gets badly affected and getting a loan becomes near to impossible because of your disability to make the credit card bill payments. The cash advances allow you to pay the bills as many times as you want.

·         Buying a luxury and expensive item

When you indulge in luxury purchases, despite your limited financial condition is considered to be quite dangerous in terms of finance. It is recommended that you shouldn’t buy something if you are unable to afford. Why should you put yourself into a debt? But the human behaviour of buying luxury items cannot be neglected. The cash advances are considered to be the best option. 


·         Filing a bankruptcy


Bankruptcy is emotionally and financially draining. When there can be no recovery there is bankruptcy. The fact remains unchanged that it cannot disappear overnight magically. It is no doubt a crack in your credit history, that affects the credit score negatively. Once you become aware of the fact, that sooner you have to file a bankruptcy, it is better to seek the aid and assistance of cash advances.




From the above analysis, it is clear that the cash advances are the best option to cater to the short term financial emergencies, which is also used as a smart exit, bypassing difficulties.

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