Loans and lines of credit are two ways of borrowing money from lenders. They are two different mechanisms. Both allow the borrower access to capital, but they differ in their characteristics and definition.
Acceptance of these two depends upon the purpose for which they are being taken, the borrower’s credit history and ratings, as well as the relationship between the borrower and the lender. So let’s look at the difference between them and what are the various types of loans and lines of credit.
Loans
A loan allows the borrower access to a fixed and specific amount of money at the start of the deal. The condition that applies to this is that the borrower will have to repay this amount plus the interest agreed upon at the time of the deal in regular installments over a specific period of time.
There are two general types of loans:
Secured loans
As the names suggest, these loans are secured by some type of collateral. In many cases, this collateral is the same thing for which the borrower has taken out the loan for. For example, a loan for a car makes the car the asset and collateral. If the borrower is unable to repay the loan over a specific period of time, then the lender can reclaim this asset and use it to complete the remaining loan. The interest rates for secured loans are lower because the risk is lower.
Since borrowers want to keep their collateral, they will be more diligent in repaying the loan. And even if they fall behind, the lender can cover most of the loan through the collateral. To learn more about secure loans and how to gain them, see personal loans nz.
Unsecured Loans
These loans are not secured by collateral. These loans are made on the basis of the borrower’s financial history. Since there is no collateral, lower loans are given out that have a higher rate of interest as compared to the secured loans. The interest rates are higher because the risk is higher. This type of loan cost a lot due to its interest rates. These rates of interest depend upon the kind of loan the borrower wants to take.
The common types of loans given out by lenders include:
1. Car loans
2. Student loans
3. Business loans
4. Mortgage
5. Home improvement loan
6. Debt consolidation loan
Line of credit
This type of money borrowing works differently. Once the line of credit is approved for the borrower, the lender will give them a credit limit that the borrower can use again and again, like a credit card. This makes a line of credit a much more efficient and flexible way of borrowing money. Moreover, this can be used for anything like daily shopping or special circumstances like renovations, debts, trips, etc.
As compared to loans, credit lines have a small minimum payment, a lower amount of money, and higher interest rates. Credit lines have payments that have to be paid monthly and consist of both interest and principal. Customer credit scores are greatly affected by lines of credit. Also, interest begins to accumulate only after you use the credit line.
There are multiple types of a credit line available and include:
1. Business credit lines
2. Personal credit lines
3. Home Equity line of credit
Conclusion
So now that you know the difference between loans and lines of credit, you should make informed and wise decisions when considering borrowing money. It will help you make the most of the loan you take out and can help your business soar in the longer term.
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