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Seven Types of Loans
By LaToya Irby. Credit/Debt Management Expert
Welcome to About.com s Credit/Debt Management site, led by your guide, LaToya Irby. LaToya has been the credit and debt management guide since 2007. Read more
There are many different types of loans you can take out. When you’re looking to borrow money, it’s important that you know your options.
Open-Ended and Closed-Ended Loans
As you make payments, your available increases allowing you to use the same credit over and over.
Closed-ended loans cannot be borrowed once they’ve been repaid. As you make payments on closed-ended loans, the balance of the loan goes down. However, you don’t have any available credit you can use on closed-ended loans. Instead, if you need to borrow more money, you’d have to apply for another loan. Common types of closed-ended loans include mortgage loans, auto loans, and student loans .
Secured and Unsecured Loans
Secured loans are loans that rely on an asset as collateral for the loan.
Unsecured loans don’t have asset for collateral. These loans may be more difficult to get and have higher interest rates. Unsecured loans rely solely on your credit history and your income to qualify you for the loan. If you default on an unsecured loan, the lender has to exhaust collection options including debt collectors and lawsuit to recover the loan.
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When it comes to mortgage loans, another term “conventional loan” is often used. Conventional loans are those that aren’t insured by a government agency like the Federal Housing Administration (FHA), Rural Housing Service (RHS), or the Veterans Administration (VA). Conventional loans may be conforming, meaning they follow the guidelines set forth by Fannie Mae and Freddie Mac. Non-conforming loans don’t meet Fannie and Freddie qualifications.
Loans to Avoid
Advance-fee loans aren’t really loans at all. In fact, they’re simply scams to get money from you. Advance-fee loans use different tactics to convince borrowers to send money to obtain the loan. Once the money is sent (usually wired), the “lender” typically disappears without ever sending the loan.