Understanding the Types of Consumer Loans

Understanding the Types of Consumer Loans

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We are consumers because we utilize goods and services every day. As a result of consumption, we incur expenses, and we can pay for the goods and services either before purchasing them or after buying them.

Concerning the second payment type, consumer loans are a type of loan given to consumers so that they can carry out transactions at their time of need and return that money in the future to the bank or some other lending entity they got the loan from. Consumer loans are generally given in a lump sum and are returned in installments over time. Moreover, they can either be secured or unsecured.

They are secured if the consumer loans are backed by collateral, i.e., assets. This means that if the borrower fails to make payment in time, the lender has the right to seize their assets. They are unsecured if assets do not back the loans. For unsecured consumer loans, lenders face problems in recovering loans if the borrower fails to pay them back.

Consumer Loans

Consumer loans come in handy, from financing education and house purchases to receiving personal loans for small everyday purchases. It may often go unnoticed, but in reality, we utilize consumer loans regularly. To better understand this, let’s go through the types of consumer loans that we utilize often.

Mortgages

A mortgage can be a first-time loan provided by a mortgage lender or a bank to someone buying a house, preferably for the first time. However, consumers can also take mortgages multiple times, but the likelihood of that is considerably less given that it takes several years to repay the mortgage. While you can get a loan equivalent to the house’s total value, people generally opt for a loan that is 80% of the house’s original value.

Since a house’s cost is much higher than the average annual earning, mortgages are spread out for many years. There are different time frames in which the consumer has to do continuous monthly payments or installments until they ultimately pay the home buyer loan. This period is generally 30 years, but there are other acceptable periods of 15 and 20 years.

The number of monthly installments for the smaller time frames will be greater than those within the more extended 30-years time period. For this reason, mortgages for shorter time frames or terms are not commonly secured.

Student Loans

To finance their education, students either take loans from the government or private companies. The majority of students take federal loans as they have fixed interest rates.

Federal loans are of two types — subsidized and unsubsidized. The students with the highest financial needs are given subsidized loans. The government pays the interest on these loans as long as the student is still completing their education. Unsubsidized loans are provided to all students irrespective of their financial conditions.

Students also go for private loans due to limitations set by the federal ones. Personal loans generally have lower interest rates, but they usually depend upon the respective market.

Personal Loans

While consumers can only use mortgage and student loans for specific purposes, personal loans can be used for paying off debts and fulfilling daily life expenses, among other uses. The time frame for repaying personal loans is ten years generally, but it may vary depending upon the loan’s nature. Since huge interests may accumulate into credit card debts, personal loans are considered an effective way to pay the debt.

Auto Loans

Auto loans are used to purchase both used and new cars. The time frame for repaying auto loans typically ranges from two to five years, but terms ranging from six to seven years are common nowadays. Unlike home value, cars’ value declines over time, so lenders typically set the maximum term limit for old cars from four to five years.

This is because, in an unfortunate event, the car values may depreciate faster than the principal loan balance, and over time, the amount you owe to the bank is much larger than the actual amount your car is worth. To avoid such a situation, it is better to opt for short-term auto loans to ensure that the interest doesn’t build up to where the principal loan is greater than your car’s value.

Consumer loans are in frequent use all over the world. The types of loans discussed above not only fall under consumer loans but are also categorized as business-related loans. Since an average person does not possess the ability to purchase all the services of life at once due to financial constraints and other reasons, consumer loans are indeed feasible means to own assets by legal procedures.

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