Common Types of Loans Offered by Banks

There are many types of bank loans available and the type you choose will be based on your particular funding requirements. Banks allow individuals and businesses to borrow money for purposes such as paying for college, purchasing a car, investing in a business, and home loans. Missoula MT residents and businesses can benefit from understanding the types of loan products available, which include variable-rate, fixed-rate, installment, convertible, and a secure versus an unsecured loan. Each loan type has particular repayment terms – and understanding what those terms consist of can help you select the right loan for your needs.

Fixed Rate
The most common consumer loans have a fixed rate. These loan products have a steady unchanging interest rate throughout the entire life of the loan. Often the interest rate on a fixed-rate loan can be higher than that of a variable-rate loan. However, a fixed-rate loan is advantageous to buyers who want to have the security of having the same fix rate throughout the length of the loan (this is true for many home mortgages) regardless of changes in the prime rate.

Variable Rate
These loans have fluctuating interest rates that are linked to the primary or market rate. With a variable rate loan, whether it is a home loan, student loan, or car loan, the rate can vary each month. Usually, variable interest rates are lower than fixed rates for the same borrowing purpose. This makes them attractive to homebuyers or homeowners who wish to get a low rate to refinance an existing loan, respectively. However, the risk is that if market rates begin to rise, your monthly loan payment will rise as well.

Installment
An installment loan is paid in equal installments over a certain length of time. The repayment periods for these loans can extend from six months to 30 years. Auto and home mortgage loans can be defined as a type of installment loan. These loan products have repayment terms that include a starting and ending date and an interest rate that covers the life of the loan.

Secured
A secured loan is supported by some type of collateral, whether a car, house, etc. One example of a secured loan is a home equity loan. If a person defaults on a secured loan issued by a bank, the bank has the right to take the proceeds from the sale of the collateral to pay off the loan. Common secured loans include auto, home equity, boat, home mortgage, and business loans.

Unsecured
No collateral is required with an unsecured loan. These loan products are often provided to people with very good or excellent credit scores. Interest rates on these loans in Missoula MT and elsewhere are typically on the higher end and reflect the person’s credit score. The interest rate will be lower with a higher credit score. Other forms of unsecured of loans include lines of credit and credit cards.

Convertible
A loan that can be changed from one type to another during the course of the life of the loan is referred to as a convertible rate loan. As an example, business owners can utilize convertible loans to handle startup costs more effectively and then later on, convert to a fixed rate, secure loan. A homeowner may obtain a home mortgage with a variable interest rate and then later on change it to a fixed-rate loan – another example of a convertible loan.

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    Author: Greene Connor

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