Finance – Loans
The world’s entire economy revolves around loans from financial institutions. We have loans to pay off our student debt. Loans to finance our house and the car parked in the garage. We raise venture capital in the form of loans to invest in our companies. Even countries have loans to finance their different operations. You see, once you understand that loans are taken by the poorest poor and the richest rich, you develop a curious mind towards learning more about loans and their role in society.
Loans are usually a lump of money that you borrow over an agreed period of time with the expectations of you paying it back either all at once or over a set number of months. More often than not, loans come with different interest rates which is the “price” of taking a loan. That rate is very much dependent on your personal financial history. The interest rate is therefore set after determining your ability to pay the loan back. This determination is based on your income, credit history, debt and a couple of other factors that paint the big picture for the financial institutions.
As you can imagine there are different types of loans to choose from, but there are two, in particular, that stand out from the crowd. Primarily, Open-Ended loans are probably the most common loans as they can be borrowed multiple times. Credit cards or lines of credit are usually the most common type of Open-Ended loans that people take as it is very accessible and requires almost no effort to take advantage of it. As you can expect, however, there is a limit to how much money you can borrow in order for the bank to safeguard its capital in case you fail to repay the loan. But if you abide by the rules and manage to pay back the loan in time, that limit increases significantly.
The second loan alternative is a Closed-Ended loan which, in contrast to the first option, offers a one-time loan that cannot be borrowed several times once it’s been repaid. Simply put, its a loan that you overtime pay off with no credit available. If you, however, decide to borrow more money, you would have to apply for a new loan and go through the application intensive process once again to approve you of a new loan. As you can imagine loans like these include your common mortgage loans, student loans, and even car loans. There are however loans I encourage you to avoid.
Certain types of loans are structured in a way to take advantage of you and your eagerness to take borrow money. A Payday loan is a perfect example of a predatory trap as it is a very short-term loan that is borrowed using your next income or paycheck as a guarantee. Meaning if you can’t pay off the loan, you certainly won’t receive your next paycheck. These types of loans also usually have an incredibly high annual percentage rate and can sometimes be impossible to get out of. My advice to you? Speak to your local bank or financial institution before taking a loan in order to make sure you make the right financial choice and not get stuck in an endless circle of debt.