Loans

Loans are the backbone of our modern-day banking system. Debt is breaking the financial back of millions of people around the world.

The concept of loans is quite simple. You need money, so you go to the bank and you ask for that money. The bank gives you money, and in the future, you pay that money back. However, the entire process is not that simple. One must account for the interest that the amount owed garners over time. Check out our other articles for more information on compound and principal interest. Along with that, the amount of money that one can be loaned differs dramatically depending on both the type of loan as well as the person's credit score. A better credit score means a higher chance that they will be approved to get the loan that they desire. One's credit score is a measure of how well that person has been at paying off their debts in a trustworthy and timely matter. There are many different types of loans (about 10), but we will be reviewing the 5 most important types of loans.

Personal loans: Personal loans are the most versatile, and are able to be used on virtually anything. However, one must have a good credit score in order to obtain one of these loans, as personal use can mean squandering it quickly on wasteful investments or items, leaving the person with no money to pay off their debt.

Auto loans: Auto loans are, as the name says, meant for the buying of transportation vehicles if one does not have all the money needed to buy it at that instant. If the borrower does not pay back their debts in the time frame allocated, then the vehicle will be given to the bank, as payment for the loan. There is not a minimum credit score requirement, but better credit scores will have less strict timeframes to pay off the loan.

Students loans are given out by the government and private companies. They are designed for students to pay off education costs, such as tuition and books, but once given, the money is not monitored to see where it is going. If you are unable to pay it off, many times you will be required to do public service for anywhere between 10-25 years in order to gain forgiveness for your debt.

Mortgage loans are similar to auto loans in that the bank will seize your house if you are unable to pay off your debts. It requires a fairly good credit score to obtain, as houses are worth much more than cars.

Credit builder loans are interesting, because typically the borrower does not actually need the money. Also, the borrower pays all of the money off first, then gets the total loan at the end. These loans are meant for people who don't need the money, but want to build their credit scores in order to get other types of loans. By giving the bank a monthly amount of money with interest, the borrower can build up a reputation and a better credit score. At the end, the borrower does not lose too much money besides the interest owed, because they get the loan all at once when they are done paying it off.