Welcome to Universal Wealth Creation.com

This site have been developed as a resource for people

searching for the best ways to create wealth and increase the

quality of their lives. Inside you will find reviews of the latest

Investment strategies available.

Wealth Creation

Home Page

FINANCE SITES

AFR
AFR BOSS

AFR Photos

Asset

BRW

CFO

Fairfax Photos

Fairfax Research

Leverage

MIS

MoneyManager

Personal Investor

Shares

Tradingroom

Business & Finance Articles

Facts you should know about loan types
By: Prakash Menon

When you set out to borrow, you often come across terms like unsecured loans, revolving loans, adjustable rate loans, etc. While these terms are more or less self-explanatory, it is still useful to be clear on their exact meanings and what they imply before you finalize a loan contract.

Unsecured versus secured loans

As the name implies, a secured loan is one where you offer collateral of some kind against the loan. That means, if you default on the loan, the lender has the right (but not the obligation) to take possession of the asset you have pledged.

In most cases, this asset would be what the lender has financed. For example, when you take a home loan, you offer the home as collateral.

There may also be cases where you may need to offer additional collateral over and above the asset that is being financed. This happens, for example, when the lender is financing close to 100% of an asset that is prone to rapid reduction in market value. In such cases, the lender may insist on your putting up another asset so as to provide a reasonable margin of protection to the lender in case of default.

Unsecured loans are those where such collateral arrangements do not exist. These loans are granted based on your credit standing, ability to repay and other factors.

All other factors being equal, a secured loan may be offered at a lower interest rate as compared to an unsecured loan. That’s obviously because of the lower risk associated with the secured loan -- should you default, the lender has an asset to fall back on. Sometimes you end up with a choice -- you can take a loan on either a secured on an unsecured basis. The difference in APRs may be quite significant in such cases. However, being offered a choice like this is comparatively rare in consumer financing, but may exist in financing businesses.

Installment versus revolving loans

A revolving loan is one where you have access to a continuous source of credit, up to a pre-determined credit limit. If the limit is say, $10,000, you can borrow any amount up to $10,000. And typically, you can repay all or part of the amount you borrowed at a time of your choosing, within the overall tenor of the loan.

You pay interest only on the amount you borrow for the time you borrow it. Sometimes, banks may charge a commitment fee for making a revolving line of credit available to you. This fee is usually charged on the average unutilized amount of your limit.

You can also re-borrow the amount you have repaid. In effect, you have a loan that's always available to you on demand.

Unlike revolving loans, installment loans have a fixed repayment schedule. In most cases, the full amount of the loan is drawn down (i.e., borrowed) at once and both repayment schedule and amounts are fixed in advance. You do not have the option to re-borrow the amount that has been repaid.

Adjustable rate versus fixed rate loans

A fixed rate loan is one where the interest rate charged is fixed for the entire duration of the loan. The advantage is that you are immune to fluctuations in interest rates and can budget your cash outflows precisely. The disadvantage to you (the borrower) is that should interest rates fall, you lose in terms of opportunity costs. That is, you could have obtained a lower interest rate had you opted for an adjustable rate loan.

In practice, you can always choose to refinance the fixed rate loan at a lower rate if interest rates fall sharply enough to justify it. Bear in mind that your current lender may charge a pre-payment fee if you choose to repay before due date. So the difference in interest rates between your old fixed rate loan and the new loan should be large enough to justify a switch.

An adjustable rate loan is one where the interest charged fluctuates in line with a benchmark rate. This benchmark rate is usually the Prime Rate, which is what the US Treasury charges its prime (or best) borrowers. The advantage of an adjustable rate (or floating rate) loan is that what you are paying is more or less in line with the market. If interest rates decline, so do your costs and vice versa. The disadvantage is that your cash outflows for interest are unpredictable.

As a borrower, if you hold the view that interest rates are going to decline, it is best to opt for an adjustable rate loan. But arriving at the correct view consistently is easier said than done. Predicting interest rates is a game where even professional market participants and institutions frequently go wrong.

If it is important to you to be able to budget for your interest obligations in advance, a fixed rate loan may be the best choice. After all, you can refinance it should the interest rates fall significantly.

Keeping these basic facts in mind should help you make more informed borrowing decisions.

About the author:
Prakash Menon is a financial expert and writer specializing in managing personal debt and providing wealth building solutions. He has written on cash advances, personal debt management and other topics. See http://www.payday-cashadvances.netfor the 10 things you must look into before you take a payday loan.

Circulated by Article Emporium

http://www.universalwealthcreation.com Wealth Creation | Financial Wealth

Copying or republishing this article is permitted with this footer included

Collect a Free 260 page ebook here: Universal Wealth Earn up to $1,000 per referral: Wealth Creation Affiliate

These property, finance, stock market & business articles have been supplied in the interest of Universal Wealth Creations visitors who want to expand their knowledge in the wealth creation & investment fields. All the business, finance, stock market & business articles have not been read as they are submitted remotely, so if you find any questionable facts in here or simply do not like it, please email webmaster@universalwealthcreation.com and we will review the material. As we find time to do so, we will go through all articles and remove any that appear not suitable. Other sites we recommend here at Universal Wealth Creation are: 21st Century Academy with Jamie McIntyre, Investor Finance, Universal Trading Solutions which promotes great wealth creators like: Kim Reilly, Simon Martin, Justin Beeton, Louise Bedford, John Kaye, Daniel Kertcher & more. They run great seminars across the country. At times we will publish dates for these seminars as they are made available around the counrty. Meanwhile, there is a great opportunity to learn about the finance, stock market & property investment field through reading these kind of articles. Learn about share trading, options, futures, CFD's, derivatives, warrants, indices & more in the stock market. You will also learn plenty about business, finance & property investing through authors opinions in the marketplace. Enjoy your journey towards financial freedom. We hope you will enjoy your visit.

Regards Sean Rasmussen - Universal Wealth Creation Pty Ltd

Site Map

Return to Index
Return To Universal Wealth Creation Home Page

Business & Finance articles