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The most common types of loans

The most common types of loans

Financial stability is something we all want to have, and our monthly income is often not enough to give us a life which we would want to. Unless you are born into a royal family or your parents are millionaires, chances are that you live your life from one paycheck to the other, while being able to save only small amounts.

However, life sometimes throws a curve ball at us, i.e. it surprises us with unexpected events, and in those moments we have to improvise and find additional money resources. Those people who were not able to save enough will have to borrow.  This principle is inevitable and engraved into our culture and sociological systems.

Types of loans

Money can be borrowed from different sources. This completely depends on the situation and personal preferences of the person who is in need of that urgent financial boost. Most common locations where people go for money of this kind are family, friends, colleagues, banks, credit unions and perhaps some other forms of financial institutions. All of those sources will usually give the finds in exchange for a “promise” that the money will be returned within the agreed period, and some arrangements can also incorporate interests.

When it comes to loans taken with commercial banks, most experts divide loans into two basic types, according to the duration of the maturity period of the loan. Those two categories are short term loans and long term loans. These types have many similarities but they also have many points where they differentiate from each other. They are intended for different customers. Banks use this diversity to be able to satisfy as many clients as possible.

Short term loans

Loans which are taken for periods of under one year, or 3 years maximum, are considered short term loans. They are generally taken for smaller amounts. Some banks limit short term loans to $2.000, but this amount can be different depending on the bank in question. Short term loans have higher interest rates than long term loans. They also have much higher monthly installments, or they are payed in one piece. The most common type of short term loans is called payday loans. Payday loans means that the whole borrowed amount is taken of the next paycheck.

Long term loans

Long term loans are different from short term loans primarily because of their maturity date. Since these loans are taken for periods which range from 3 to 25 years, or even 30 in some cases. These loans are intended for those clients who urgently need larger amounts of money. Also they are perfect for customers who want more buying power.

Therefore, people use long term loans when they want to buy a house or a car, or when they are planning a large business investment. Most common types of these loans are car leasing, mortgage loans and student loans. But there are many other sub-types and different purposes of these loans. Long term loans have lower interest rates and lower monthly payments. That fact attracts a lot of clients to this type of financial assistance.

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