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You can arrange to borrow and
repay the money you need for specific expenses.
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When
you need money to buy a car, pay college tuition,
fix up your home, or anything else that requires
an immediate cash outlay, you're often able to borrow
the amount from a lender such as a bank, credit
union, or mortgage company. If you know how different
types of loans work and the particular features
they offer, you'll be in a better position to look
for the one that will be best suited for you.
In some ways, of
course, all loans are alike. You borrow money, called
the
principal, and agree to pay it back over
a specific
term, or length of time, with
interest. But the conditions of the loan,
some of which are listed below, can affect how much
you can borrow and how much the loan will cost you.
- The term of the
loan
- Whether the interest
is fixed or adjustable
- Whether the loan
is secured or unsecured
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INSTALLMENT LOANS
When you take an installment
loan, you borrow the money all at once and repay
it in set amounts, or installments, on a regular
schedule, usually once a month. Installment loans
are also called closed-end loans because they are
paid off by a specific date.
SECURED LOANS
Your loan is secured
when you put up something of value, called
security or collateral, to
guarantee you'll repay what you owe. The lender
can repossess the collateral and sell it if you
default, or fail to repay. Car loans and
home equity loans are the most
common types of secured loans.
UNSECURED LOANS
An unsecured loan is
made solely on your promise to repay. If the lender
thinks you are a good risk, nothing but your signature
is required. However, the lender may require a co-signer,
who promises to repay if you don't. Since unsecured
loans pose a bigger risk for lenders, they may have
higher interest rates and stricter conditions.
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LINES OF CREDIT
A personal line of credit
is a type of revolving credit. It lets you write
special checks for the amount you want to borrow,
up to a limit set by the lender. The
credit doesn't cost you anything
until you use the money. Then you begin to pay interest
on the amount you borrowed. You must repay at least
a minimum amount each month plus interest, but you
can repay more, or even the whole loan amount, whenever
you want. Whatever you repay becomes available for
you to borrow again.
Banks and credit card
issuers sometimes offer lines of credit automatically
to people they consider good customers. That doesn't
mean you have to use your line of credit if you
prefer not to.
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