Credit or Loan Types Features and Major Different Ways of Lending or Borrowing
Money
is the vital component for any business venture, after all you need funds for
short term and long term dealings. If you have any plans to start a business,
no matter what scale, it is not possible for you to arrange the entire funds.
Hence, you seek the aid of loans and advances. Loans are basically debts that
are offered by any financial institutions for a specific span of time. On the
other hand, Advances are the funds offered by the banks to the business
ventures in order to cater to the capital demands. This needs to be paid back
within a year’s time.
You have to repay the amount of loan along with the interest
either in installments or in a lump sum amount. You can choose either the term
loan, which needs to be repaid after 3 years or a demand loan that has to be
paid within 3 years. The advances also need to be repaid along side the
interest within a year’s time. Whenever we talk about the loans and advances,
they are conceived as the same. But when you minutely explore the two terms and
study about them, you will find that there are so many differences between the
two.
What do you know about loans?
A loan is the amount that is lent to the borrower for a
particular reason for a specific time frame. The purposes include machinery
purchase, capital needs and the construction of the building. Banks and
financial institutions grant loans and act as the lender. As a borrower, you
need to repay the loan amount within a deadline provided. Before lending the
loans, the banks or financial institutions will check the borrower’s financial
stability, the potential to repay, credibility and the credit report of the
borrower.
Categorization of loans
A loan can be categorized in the given below classes:
On the ground of security, we have:
1.
Secured loan
2.
Unsecured loan
There are at least three types of loans in the USA based on the repayment
- Installment loan
- ime loan
- Demand loan
Based on the purpose of the loan approval
- Education loan
- Car loan
- Home loan
- Commercial loan
- Industrial loan
What do you know about the Advances in the United States of America?
According to general global scenario when any company or a
business venture has the short term fund or financial requirement, the advances
are offered by the banks. It is basically a credit facility that has to be repaid
within a year. The terms and conditions have been issued and stipulated by the
Fed Reserve, similarly by Banking regulators in their respective countries like
Bank of Japan, Reserve Bank of India, and so on. There are securities against
whom the advances are provided. They include:
- Guarantees
- Collateral Security
- Primary Security
Some popular types of bank
advances in the US include at least:
- Bills Purchased
- Cash Credit
- Overdraft
- Short term loans
What are the key differences between loans and advances?
Let us find out some of the major differences between loans
and advances:
- The loans are a form of debt, while advances are credit facility offered by the banks.
- The loans are provided for a long term. On the other hand, the advances are provided for a short period of time.
- Loans have quite a number of legal formalities, but the advances have less complicated legal formalities.
- In terms of the security, loans may or may not be as secured as expected. But, advances are secured via guarantor or an asset.
From the explanation, it is quite sure that loans and the
advances are two different things.
Understand different loans and credits
If you explore the loan contracts in more detail, you will
find that it comes in varying forms with different terms, ranging from the
promises between family members and friends to complicated and complex loans in
the form of mortgages, student loans, payday loans, auto loans and so on.
Despite the type and form, you will find that every loan with
the repayment conditions are governed by the State and the Federal guidelines.
This is done in order to guard and protect the consumers from the offensive
practices, especially, the high interest rates. Additionally, it is also
essential to ensure that the length of the loan and the default terms and
conditions are clearly mentioned so that there are no confusions.
When there is a default, the outstanding debt’s collection
terms and the costs associated must be mentioned clearly in details. When you
demand for money for any important item or in order to make your life easier,
it is better that you understand the different types of credits and loans that
you can access and the terms and conditions that you need to deal with.
What are the types of credit that we need to know?
When
you look at the consumer credit categories, there are two types. They include:
1. Open-end credit
2. Closed-end credit
The
open-end credit, is also known as the revolving credit, can be used multiple
times for purchases you want to make. The repayment is monthly basis, though
you are exempted from paying the complete amount due every month. The credit
cards, home equity loans and the home equity lines of credit (HELOC) are the
common types of open-end credit.
You
use the credit cards on a regular basis, on the expenses like clothing, food,
transportation and even for home repairs. There is an interest charge that is
levied on the card, and it is not necessary to pay it in full. Furthermore, the
interest rates charged is 15% on an average, but can be as high as 30% or even
0%. This all depends on your credit score and your payment history.
The
closes-end credit, also known as installment loans are used for financing any
specific purpose for a stipulated frame of time. As a consumer, you are asked
to abide by certain regular payment schedules, which is preferably monthly. The
monthly charges include the interest charges as well till the principal amount
is fully paid.
Depending
on the consumer’s credit score and the lender, the interest rate varies. In
case, there is a default on the loan on the part of the consumer, the lending
institution has the full authority to completely seize or take away the property
of the consumer. Some of the examples of the close-end credit are car loans,
appliance loans, mortgages, payday loans etc.
The different types of loans available
Every
type of loan has a specific reason of purpose or use. Hence, they vary with
respect to the time period, due payments, interest interest and several other
factors. Let us have a look at some of the most common and popular types of
loans that are available.
Mortgages
When
you want to purchase a home, but cannot make the payment right then, the bank
provides the mortgages, which are basically loans. A mortgage loan is linked to
your home, failing of repayment means you are risking your home. It is said
that the mortgages have the lowest interest rates when compared with all other
types of loans that are available.
Student loans
In
case, you are a student and want to study further, but lack the funds, the
banks offer the student loans. This helps to cover the cost of your higher
education. There are two primary types of student loans available. They are:
- Federal student loans
- Private student loans
When
you compare both the student loans, it is found that the Federal loan is way
better than the private student loans. This is because the former comes with a
lower interest rate, which is helpful for the students and their families when
repaying the loans. Moreover, the Federal student loans have friendly and
hassle free repayment terms.
Personal Loans
When
you want some funds to be used for your personal expenses without any specific
purpose, personal loans are considered as the best option. The personal loan is
quite an appealing one for all those individuals who have outstanding debts,
especially associated with the credit card debts. Like any other loans
available, the approval of the personal loan also depends on your credit
history and your potential to repay within the specific term.
Auto Loans
Similar
to the mortgages, the auto loans are linked to your property. You can buy your
dream car via the auto loan. But, in case, you miss out paying the installment,
your car is at risk to get seized by the money lending institute. Banks and the
car dealership can offer you with such loans. But, it is suggested to opt for
the banks, as the interest rates are lower as compared to the car dealers.
Small Business Loans - SME Loan
In
case, you are planning to start up a business or want to expand your present
business, you can seek the aid of the small business loans. The SBA or the US
Small Business Administration is the best source for the small business loans.
Depending on the type and the demands of your business, you can get hold of
varying loan options and choose the one that suits your business the best.
Veteran Loans
If
you are a veteran, or belong from one of such family, the Department of
Veterans Affairs (VA) offers with money lending programs. When you are applying
for a VA home loan, the fund will not reach you from the administration
directly. It is the VA that acts as the co-signer and backs you for the loan of
a higher amount, but with much lower interest rates.
Consolidated Loans
The
consolidated loans are more or less similar to the personal loans or the
mortgages. When you have many outstanding debts, especially associated with the
credit card debts, the consolidated loans can make things easier for you. With
such a loan, you can clear all your debts. With a few monthly installments and
low interest rates.
Payday Loans
Payday
loans have been specially designed for those individuals who repeatedly borrows
money. Basically, the loans are borrowed, to cover the gap from one paycheck to
the other. The loans have a very high interest rate and have short term repay
tenure. The loan is not recommended by the government, because it will cost
really high for the consumers.
Borrowing money from family members and friends
When
you are borrowing money from family members and friends, it is considered as an
informal loan. There are several people who prefer borrowing money in such an
informal manner. But, it is always better to sign a promissory note between
both the parties so that the relationship between you and your loved ones are
not strained.
Borrowing funds from the retirement and life insurance
If
you have accounts with retirement funds or life insurance, you are eligible for
borrowing money. This loan option seems to be easier and less hassle free. It
is because you are borrowing from your own account. Hence, the repayment is so
easy and simple. When you fail to repay the amount borrowed, you will have to
face extreme tax charges.
Cash Advances
This is a short term loan that is provided against your
credit card. With the help of the cash advances, you don’t have to use the
credit card in order to make payment or shop. You can bring the cash advances
to any ATM or bank and get cash instead and spend it the way you like it. In
fact, the cash advances can also be used by writing a check to the payday
lenders.
Home equity loans
When
you have an equity in your home, you might not even realize that the worth of
the house is more than you actually owe it. You can make use of the equity of
the home in order to make payments for any other big dreams. Home equity loans
are considered good for the following:
- Credit card debt consolidation
- House renovating
- Paying huge medical bills
- Student loan repayment
- Act as a retirement income supplement
You
can basically use the home equity loans for any other projects that are
underway.
Since
you are a borrower, your home is used as a source of collateral against the
home equity loans. The best part is that you will find that the interest rates
are quite low as compared to the credit cards. In case, you have any plans to
sell the house in the future, make sure that the home equity loans are repaid
completely.
You must understand the terms of the loans
No
matter what is the purpose of you borrowing the money, either to make bill
payments or buy luxury items like a home or a car, you have to ensure that
understand the loan agreements completely. Moreover, you must have the
knowledge with the type of loan you will receive and what are the risks involved
in case, there is any failure of repayment.
It
is also important that get to know about the repayment terms. For instance, the
amount of repayment that you need to pay every month, the tenure of the
repayment and the effects of missing repayments. In case, you lack the
understanding, you should never hesitate to clarify your doubts about the
agreements.
The varying types of advances/ loan types provided by the commercial banks
Demand Loan
In
case of a demand loan account, the full amount is paid to the person who owes
the creditor. It is paid either in the form of a cash or via the transfer of
fun to the current or savings account. There is no succeeding debit allowed,
with an exception to the interest rate cost, the insurance costs, security
expenses and incidental charges.
The
demand character of the loan doesn’t get affected in any way when the repayment
is offered via the installments. In respect to the repay installments, there
are strict stipulations mentioned. For instance, if any, of the installment is
unpaid, the complete loan amount will be due. There is an interest rate that is
charged on the debit balance. In such a situation, you will not be issued with
any cheque book. There is a security against the demand loan in the form of
shares, fixed deposit receipts, life insurance policies, valuable goods,
government paper etc.
Overdraft
As
an unsteady account, the overdraft balance can be in the credit or in the debit
account. You will be allowed with an overdraft account, only if you have a
current account. It is because of the overdraft that allows you to draw the
amount that is beyond the stipulated limit. In order to make it more clear, let
us consider an example.
Suppose
there is a credit balance of around US$ 890 in your current account, and the
overdraft stipulated limit is approximately around US$1113. You have the option
of withdrawing a cheque amount of around US$2003. You will face absolutely no
limitation unlike in case of the case, where drawing money more than once is
restricted.
You
get the option of drawing and repaying as many times you wish to, until the
total debit balance doesn’t exceed the stipulated limit amount at any time.
This whole perspective is a satisfactory and contended option from the
viewpoint of a customer. As a customer, you won’t have to fear that once
deposited the amount cannot be withdrawn more than once, unlike in a loan
account.
The
overdraft is provided against tangible security in the form of:
- Life insurance policies
- Fixed deposit receipts
- Government papers
- Shares
When
you have an overdraft account, a cheque book will be issued.
Term Loan
A term loan is granted to a customer for a fixed time period,
that can exceed up to three years or even more. The repayable term is based on
the stipulated schedule, that you have to abide by as a customer. The period
for the term loan can extend up to 10 years, and even up to twenty years in
certain cases.
In order to get a term loan granted, you have to
showcase the purpose of the requirement as it is provided for fixed fun
demands. For example, building and land investment, investment in equipment and
tools, or investing in factories and plants. Setting up a new project or
expanding a factory can be granted a term loan as well.
Cash Credit
It is basically a drawing account that is granted against the
credit cards. The cash credit functions more or less similarly like the current
account in which a limit on the overdraft has been stipulated. As a customer,
you can enjoy a massive advantage from the cash credit. Within the given limit,
you have the right to operate your account as and when required. Moreover, you
also get the amazing opportunity to save the interest rate charge as you get
the chance to reduce the debit balance whenever you are in the position to do
so.
As a borrower of the cash credit, you also have the option of
offering with the substitute securities in a timely manner, keeping in
compliance with the terms and the conditions and as per your requirements and
demands. The cash credits are usually granted against securities like raw
materials, finished good or the stocks that are in process and against book
debts. Whenever there is an excellent turnover without any negative effects, a
cash credit limit can be initiated that can be continued for years to come, with
necessary periodical evaluations.
Bills Discounted
Whenever there are usance bills that mature within three
months are often given discounts and rebates by the banks for certain
customers. Let us take an example to understand even better. Suppose you have a
bill worth US$223 which is due in 90 days. Because the bank provides a
discount, you will receive the same by at least 20% per year. The borrower gets
paid approximately US$211, its present value. The full amount can be collected
once the maturity is complete. The distinction between the present value and
the bill amount is the earning of the banker for the time period for which the
bill will operate. Such a case of income is referred as the discount in
banking.
Bills purchased
Clean or documentary bills are often bought from the approved
customers who are set with stipulated and sanctioned limits. When we are
considering the case of a documentary bill, there are drafts made that can be
associated with the paperwork of title to different goods and items like BOL or
the Bills of Landing, railway receipts and so on. Before the limit is granted,
the worthiness of the credit of the fund drawee needs to be evaluated. The
financial stability of the drawees of the bills are verified very strict,
especially the bills are drawn repeatedly and the amount is large.
The term “bills purchased” indicates that the bank is the
owner/purchaser of such bills. In the majority of the cases, it has been found
that the bank holds on the bills as a measure of security for the advanced
granted. Additionally, under the rules and regulations, the bank has the right
to move against the parties liable on the bills.
What do you understand by Cash Advance?
A Cash Advance is issued by a bank or any financial
institution as a short term loan. The Cash Advance enables the credit card
holders to withdraw a certain amount of cash amount. Such a type of funding has
the disadvantage of high interest rates, but is still appealing to the
borrowers. The reason behind the popularity and approval of a high interest
rate cash advance is the quick funding option and the faster approval from the
bank when compared to any other types of loans or funds granted by the bank.
What are the different types or categories of Cash Advances?
If you explore the domain of cash advances, you will come
across a wide variety of them. But the majority of them are know have a very
high interest rates and fees. Let us have a look at some of the popular types
one by one briefly.
Credit card cash advances
Perhaps the most popular and widespread type of cash advances
is borrowing via a credit card. You can withdraw the amount of money from the
ATM, which particularly depends on the credit card company. In fact, you can
even cash out the money from the bank from the cheque that has been deposited.
Hence, the name credit card cash advances.
This type of cash advance has a steep interest rate, which is
higher that the regular purchase rates. On an average you will have to pay
around 23.53%, which is around 8.54% higher than your average APR for the
purchases you make. The worst part is that there is no grace period that gives
you the time frame to stabilize before the interest rate starts to rise. The
interest starts to rise immediately at a steep pace.
The credit card cash advances also come with a fee, which is
either calculated as the percentage of the advanced amount or the flat rate.
When you are using the ATM in order to get access to the cash, you will be
charged with a small percentage of the fee (usage fee). Apart from all such
fees and rates, the credit card cash advances also include an independent
balance from the credit purchases you make. You have the option of applying the
monthly payments to any of the balances.
In case, you are making the payment of the minimal due
amount, the issuer of the car is allowed to apply it to the balance keeping the
interest rate low, as per the Federal Law. This is the rate compatible with the
purchases. Hence, the balance might increase the interest rate for the coming
few months. If you minutely research, you will find that in the majority of the
cases, the credit card cash advances don’t have any low interest rate offers.
But the plus side is that it is very easy and fast to acquire.
Direct Deposit Advances
On the ground of your direct deposits, the bank will advance
an amount to you. When the deposit is finally granted and delivered, the bank
recovers the loan amount and the related fees. In almost every case, the
repayment to be made for the cash advance is withdrawn out of your account,
before any automatic payment, charged or cheques are allowed to operate. In
2014, there were numerous complaints regarding the fee structure associated
with the cash advances. This led to the discontinuation of the direct deposit
advances by some of the major banks and alternative lending institutions.
What are Merchant cash advances?
The merchant cash advance is a type of loan that is granted
by the merchants or the companies from the banks and any other alternative
money lending sources. Usually, the business ventures or organizations that
don’t have the perfect credit make use of the cash advances in order to fund or
finance their business activities.
In certain cases, the merchant cash advances are also used in
order to make the payment for future credit card receipts. There is a part of
the fund that the merchant receives from the sales in the online account as
well. Instead of making use of the credit score of the business venture or the organization,
the alternative financial institutions evaluate the credit worthiness potential
by considering several aspects. One such element is the amount of the money
that the merchant receives via the online accounts, for instance, PayPal.
What are Payday loans?
If you are aware of the consumer lending terminology, the
phrase “cash advance” can also be used to denote to the payday loans. The
payday loans are issued or granted by the special category of the payday
lending institutions. The amount of the loan can range from US$ 50 to US$ 1000.
But, unfortunately, they are accompanied by a fee, which varies from $15 to
$100 per borrowed loan. Moreover, the interest rate can exceed almost 100%.
Instead of considering the credit score of the borrower, the
lending institution will consider the grant of the loan on the grounds of the
local state laws and regulations and also on the size of the paycheck of the
borrower. When the loan is approved, the lender will provide the borrower with
cash. The whole transaction can also take place online, where the lender will
initiate an electronic deposit of the amount to the savings or current account
of the borrower.
The payday loans are basically short term, in the literal
sense. The borrower have to repay the loan amount the very next payday. But,
there is a chance of extending the period of the loan, and in such a situation,
an extra interest rate will be charged. There are several applicants of the
payday loan who are ready to make the additional interest rate charge and
extend the loan term period. As per the survey reports go of the Consumer
Financial Protection Bureau (CFPB), around 80% of the payday loans are rolled
over within a month’s time of the previous loan.
The best part about the payday loan is that is really quick
and fast. In order to get the loan, you have to write and submit a postdated
cheque to the payday lending institutions for the amount of money that you want
to borrow, which includes the fees and other additional charges if any. The
lender will instantly issue or grant the amount of money that the applicant
wants to borrow. But he/she needs to wait to turn the cheque into cash until
the payday comes.
In the present era of the digital transactions, the lenders
ensure that the borrowers of payday loans sign an agreement for the automatic
repayment from their bank accounts. When you apply for the payday loans, you
will be asked to provide with your proof of income and some personal
identification details. There are several employers who offer the payday loans as
a service to their employees. The terms and the conditions vary, but in the
majority of the cases, there are no interest rates, fees or additional charges
are filed.
Can the Cash Advances negatively affect your credit score?
This is a question that pops in the mind of so many people
out there who look out for borrowing cash advances from the banks and other
alternative lending institutions. The good news is that the cash advances will
not show any kind of direct impact on your credit score. Having a good credit
score is very important, especially when you look out for loans for buying a
home or car. But the cash advances might have some indirect effects in several
ways.
When you withdraw the advances via your credit card, it will
undeniably increase your outstanding balance. This in return will bring an
increase in your credit utilization ration. This is the tool that measures and
calculates your credit score. Let us take an example to understand the concept
of the credit utilization ration.
Suppose you owe an amount of US$ 500 on a US$ 1500 limit
card. This makes your credit utilization ration 30%. In case, you withdraw an
amount of US$ 300 in advance on the card, the balance goes to $800, making the
credit utilization ration to 53%. Whenever the credit utilization rates are
high, it is an indication that there is a risk involved with the credits.
Henceforth, your credit score gets affected badly and your utilization ratio
goes beyond 40%.
It goes without saying that the cash advances carry a steep
interest rate, which negatively influences your potential to make the monthly
charges efficiently. This can be one of the prime reasons for impacting your
credit card score. When the cash advances exceed your credit card’s limit, your
credit score will be hurt. This means that even after you pay the balance, the
credit report will display the highest balance. The lenders will find out that
you were once or the number of times you were over the limit of the credit,
affecting your potential to get a new credit card any time sooner.
The advantages of cash advances
If you are someone who has an urgent need for money or has a
restricted resource for getting the fund,. A credit card cash advance can be an
excellent solution. This holds good only for those people who have the clear
intention and the potential to repay the money in a short interval of time
period. The credit card cash advances are often considered a better option than
the payday loan, especially for the flexibility of the former.
Let us find out the situations or conditions when the cash
advances can be considered an excellent option to consider.
· Paying Credit Card Bills
Credit card debts cannot be ignored. As the days pass by, the
interest rates and the other additional charges soar high. In fact, your credit
score gets badly affected and getting a loan becomes near to impossible because
of your disability to make the credit card bill payments. The cash advances
allow you to pay the bills as many times as you want.
· Buying a luxury and expensive item
When you indulge in luxury purchases, despite your limited
financial condition is considered to be quite dangerous in terms of finance. It
is recommended that you shouldn’t buy something if you are unable to afford.
Why should you put yourself into a debt? But the human behaviour of buying
luxury items cannot be neglected. The cash advances are considered to be the
best option.
· Filing a bankruptcy
Bankruptcy is emotionally and financially draining. When
there can be no recovery there is bankruptcy. The fact remains unchanged that
it cannot disappear overnight magically. It is no doubt a crack in your credit
history, that affects the credit score negatively. Once you become aware of the
fact, that sooner you have to file a bankruptcy, it is better to seek the aid
and assistance of cash advances.
From the above analysis, it is clear that the cash advances
are the best option to cater to the short term financial emergencies, which is
also used as a smart exit, bypassing difficulties.
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