When you set out to borrow, you often come across terms like unsecured loans, revolving loans, variable rate loans, etc. While these terms are more or less explicit, it is always useful to be clear on their exact meanings and what they imply before you finalize a loan contract.
Unsecured loans secured against
As its name implies, a secured loan is one where you offer some kind of collateral against the loan. The agreement is that if you default on the loan, the lender has the right (but not the obligation) to take possession of the assets that you promised.
In most cases, this asset would be what the lender has financed. For example, when taking a mortgage, offer the home as collateral.
There may also be instances where you may need to provide additional safeguards beyond the asset that is financed. What happens, for example, where the lender is financing close to 100% of an asset that is subject to a rapid reduction in market value. In such cases, the lender may require that you set up another asset so as to provide a reasonable margin of protection in case of default.
Unsecured loans are those where collateral does not exist. These loans are awarded based on your credit rating, ability to repay and other factors.
In cases where there is a choice available to the customer to take either a guarantee or an unsecured loan, the first may be offered at a slightly lower rate. That is, assuming all other factors remain equal. This is due to the low risk for the lender, which uses a specific asset in case of default. However, this situation is relatively rare in the consumer financing, although it is more common in corporate finance.
Deposit credits from renewable
A revolving loan is one where you have access to a continuous source of credit, up to a preset credit limit. If the limit is say, $ 10,000, you can borrow an amount up to $ 10,000. And generally, you can repay all or part of the amount you borrowed at a time of your choice, within the overall content of the loan.
You pay interest only on the amount you borrow for the time you borrow. Sometimes banks may charge a commitment fee for a revolving line of credit available to you. This tax is usually levied on the average unused amount of your limit.
You can also borrow back the amount you paid. Indeed, you have a loan that is always available on request.
Unlike revolving loans, installment loans have a fixed repayment schedule. In most cases, the total loan amount is taken (ie, borrowed) at once and the repayment schedule at a time and the amounts are fixed in advance. You do not have the opportunity to re-borrow the amount that was repaid.
In variable rate versus fixed rate loans
A fixed rate loan is one where the interest rate is fixed for the duration of the loan. The advantage is that you're immune against fluctuations in interest rates and cash outflows can your budget accurately. The disadvantage of you (the borrower) is that interest rates should fall, you lose in terms of opportunity costs. That is, you might have gotten a lower interest rate if you had opted for a variable 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. Keep in mind that your current lender may charge pre-payment if you choose to repay ahead of schedule. So the difference in interest rates between your old fixed rate loan and the new loan must be large enough to warrant a switch.
A variable rate loan is one where the interest costs fluctuate in line with a reference rate. This reference rate is usually the prime rate, which is what the U.S. Treasury charges its first (or best) borrowers. The advantage of a variable rate (or variable rate) loan is that what you pay is more or less in line with the market. If interest rates fall, so do your costs and vice versa. The downside is that your cash outflows for interest are unpredictable.
As a borrower, if you hold the view that interest rates will fall, it is better to opt for a variable rate loan. But arriving at the correct view is always easier said than done. Predicting interest rates is a game where even market participants and professional institutions frequently go wrong.
If it is important for 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 drop significantly.
Given these basic facts in mind should help you make better decisions borrowing.
Article Source: http://EzineArticles.com/?expert=Prakash_Menon
Unsecured loans secured against
As its name implies, a secured loan is one where you offer some kind of collateral against the loan. The agreement is that if you default on the loan, the lender has the right (but not the obligation) to take possession of the assets that you promised.
In most cases, this asset would be what the lender has financed. For example, when taking a mortgage, offer the home as collateral.
There may also be instances where you may need to provide additional safeguards beyond the asset that is financed. What happens, for example, where the lender is financing close to 100% of an asset that is subject to a rapid reduction in market value. In such cases, the lender may require that you set up another asset so as to provide a reasonable margin of protection in case of default.
Unsecured loans are those where collateral does not exist. These loans are awarded based on your credit rating, ability to repay and other factors.
In cases where there is a choice available to the customer to take either a guarantee or an unsecured loan, the first may be offered at a slightly lower rate. That is, assuming all other factors remain equal. This is due to the low risk for the lender, which uses a specific asset in case of default. However, this situation is relatively rare in the consumer financing, although it is more common in corporate finance.
Deposit credits from renewable
A revolving loan is one where you have access to a continuous source of credit, up to a preset credit limit. If the limit is say, $ 10,000, you can borrow an amount up to $ 10,000. And generally, you can repay all or part of the amount you borrowed at a time of your choice, within the overall content of the loan.
You pay interest only on the amount you borrow for the time you borrow. Sometimes banks may charge a commitment fee for a revolving line of credit available to you. This tax is usually levied on the average unused amount of your limit.
You can also borrow back the amount you paid. Indeed, you have a loan that is always available on request.
Unlike revolving loans, installment loans have a fixed repayment schedule. In most cases, the total loan amount is taken (ie, borrowed) at once and the repayment schedule at a time and the amounts are fixed in advance. You do not have the opportunity to re-borrow the amount that was repaid.
In variable rate versus fixed rate loans
A fixed rate loan is one where the interest rate is fixed for the duration of the loan. The advantage is that you're immune against fluctuations in interest rates and cash outflows can your budget accurately. The disadvantage of you (the borrower) is that interest rates should fall, you lose in terms of opportunity costs. That is, you might have gotten a lower interest rate if you had opted for a variable 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. Keep in mind that your current lender may charge pre-payment if you choose to repay ahead of schedule. So the difference in interest rates between your old fixed rate loan and the new loan must be large enough to warrant a switch.
A variable rate loan is one where the interest costs fluctuate in line with a reference rate. This reference rate is usually the prime rate, which is what the U.S. Treasury charges its first (or best) borrowers. The advantage of a variable rate (or variable rate) loan is that what you pay is more or less in line with the market. If interest rates fall, so do your costs and vice versa. The downside is that your cash outflows for interest are unpredictable.
As a borrower, if you hold the view that interest rates will fall, it is better to opt for a variable rate loan. But arriving at the correct view is always easier said than done. Predicting interest rates is a game where even market participants and professional institutions frequently go wrong.
If it is important for 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 drop significantly.
Given these basic facts in mind should help you make better decisions borrowing.
Article Source: http://EzineArticles.com/?expert=Prakash_Menon
0 comments:
Post a Comment