Sometimes unexpected bills and purchases airs such as medical bills or car expenses. This is where taking out a loan can help. But first, you’ll need to understand the types of loans offered in the market because specific loans are suitable for certain purchases.
There are many variables to consider when looking at different types of loans which can be quite overwhelming. So we’ve put together a comprehensive guide on the types of loans to help you determine the most appropriate loan for your current needs.
How are small loans different to others?
Small loans differ from house and car loans because they aren’t required to be supported by any asset. In most cases, identification and a brief financial history, such as a bank statement, will suffice in your application. Another difference is their use. Whereas house and car loans are applied to exactly those things, small loans can be used for anything, including tackling financial dismay.
Generally speaking, small loans can be acquired to assist in meeting any personal needs. For example, if you have an upcoming wedding that needs financing. A borrower could even kickstart his or her own business venture!
What Are The Advantages of Small Loans
As they become more popular, the different types of small loans have needed to adapt to today’s environment. That’s why, in most cases, the terms and conditions are relatively simple, adding to its benefits.
Here are the top advantages of acquiring a small loan:
- Small loans can be used in different ways, no matter the reasons for a loan. However, most lenders do not allow using small loans for suspicious purposes such as gambling or illegal activities.
- The documentation process and procedure is very easy. Apply. Show proof of identification. Show your bank statement.
- Small loans can be applied in less than 24 hours, in which you could receive funds in your account within hours.
- They are being offered at affordable interest rates.
- Small loans usually don’t require any assets to secure the loan.
- You don’t need great credit to apply for a small loan.
Secured vs. Unsecured Loans
With a secured loan, the lender most likely requires a borrower to offer an asset as security for the loan. If you’re unable to pay off the loan amount, the loan provider can seize and sell the secured asset (collateral) to meet the repayments.
Secured Loans usually allow you to offer up the following as security, in exchange for lower rates and fees:
- Property (home)
- Vehicles (cars, boats etc.)
- Cash (term deposit)
- High-value assets (jewellery, paintings etc.).
Unsecured Loans don’t require you to put up an asset as collateral. Although lenders can approve unsecured loans based on your creditworthiness. As such, unsecured loans tend to charge higher interest rates and fees compared to secured loans. Examples of unsecured loans are student loans and credit cards.
The main differences between secured and unsecured loans are the loan amount and interest rate. By securing a loan, lenders are more likely to provide a higher loan amount or a lower interest, reducing your total repayment cost.
Fixed Rate vs. Variable Rate
Loans can also come with either a fixed or variable interest rate. Either loan is suitable to you depending on what you use the money for. A fixed rate loan is a loan where the interest rate is locked in or remains the same for the duration of the loan. While a variable rate loan is a loan where the interest rates on the outstanding balance can change based on your lender or the broader market.
Fixed Rate loans usually have higher rates and fees, such as exit fees. Its more structured repayments may be better for large purchases.
Variable Rate loans can offer you lower rates and fees, but be aware that the interest rate can fluctuate. It’s a better option for a smaller loan amount that you can pay off quickly.
Home Loan vs. Mortgage
You may be able to get a Home Loan if you have equity in your home. The home’s equity, or a portion of it, can be accessed and paid out as a lump sum. The loan amount is usually repaid over 5-30 years.
A Mortgage can help you finance the purchase of a home or an investment property. It is a type of loan in which your home or property is tied (collateral) to the terms of the loan. You then pay back the principal amount and interest over a series of repayments.
To calculate your home’s equity, subtract your mortgage balance from the assessed value of your home. For example: $250,000 (home’s assessed value) — $150,000 (mortgage balance) = $100,000 (home’s equity).
Personal vs. Business Loans
You’re able to take out Personal Loans to pay for things that come up. The most common types of personal loans are small loans, which offer fast approval and payment, and require minimal documentation.
Business Loans are different types of lending that can be a little harder to set up, but offer bigger incentives. The amount you borrow can be higher and have a lower interest rate, especially if you secure a business asset, such as a work truck.
If you need a loan for your business, it doesn’t have to be a ‘business’ loan. You can use personal loans for your business too, although not the other way around.
If you liked our article, find out more about what Cigno Loans can do for you on our blog. There’s really helpful articles for when you’re thinking about applying for a loan, basic info about the types of loans, and even reasons for a loan rejection, among other useful resources.
Disclaimer: Please be aware that Cigno Loans’ articles do not replace advice from an accountant or financial advisor. All information provided is intended to be used as a guide only, as it does not take into account your personal financial situation or needs. If you require assistance, it is recommended that you consult a licensed financial or tax advisor.