Loans are "borrowed money". There are many types of loans. Loans can be useful to us and it can be harmful to us, depending on how you make use of loans. Why people want to borrow money? Why they want to fill up application forms and apply for loans? Lets take a look at the types of loans available:
Types of Loans
1. Variable Rate
A variable-rate loan has an interest rate that is variable in accordance with changes in market interests rates, usually in response to minimum lending rates announced by the government. When the rate changes, the monthly payment sum will also change.
2. Fixed Rate
Many instalment-based loans have a fixed rate of interest. This means that the interest rate and, therefore the monthly payments, stay the same for the term of the loan.
3. Secured Loans
The loan is secured when a borrower puts up security or collateral to guarantee it. The lender can sell the collateral if the borrower fails to repay. Car loans and mortgage loans are the most common types of secured loans.
4. Unsecured Loans
An unsecured loan is made solely on the borrower's promise to repay. If the lender thinks the borrower is a good risk, nothing but his signature is required. However, the lender may require a co-signer, who promises to repay if the borrower does not. Since unsecured loans pose a bigger risk for lenders, they may have higher interest rates and stricter condition.
5. Pawnshops
Pawnshops lend a person money in exchange for personal property that the person left with them, usually equivalent to a small portion of its value. If the customer repays the loan and the interest on time, he gets his property back. If he does not, the pawnshop will sell it. However, an extension of time can often be arranged. Pawnshops charge a much higher interest rates than other lenders, but credit is advanced immediately. Pawnshops provide the loan with little hassle and depending on the type of property, the customer can get quite a large sum of money in relation to the market value of the property.
People borrowed money because they do not have the means to pay a huge sum of money for the things they want, such as houses, cars, study, or even to start up a business. On the other hand, some people may afford to pay for their businesses or cars or houses, but they rather take up loans because they are capable of using their money to invest (to make their money work better for them, and they do not mind paying the interest, as they can make more money such as from foreign exchange or stock investing.)
During our life time, some loans are necessary while some loans can be avoided or unnecessary. Some examples of necessary loans are housing loans and probably study loans. Renovation loan or home improvement loan is another one to be considered necessary as everyone need to have their dream home renovated before they can move in. Loans which you may want to take is car loans, though it is not a necessity to own a car, especially in small country like Singapore where public transport is very convenient.
By deciding to take up loans, you agreed to abide the rules, terms and conditions of the banks in which you had signed up with them. By taking their loans, you agreed to pay them interest regularly such as per month and over a period of time.
Whatever reasons for taking loans, as long as one is working and is able to repay back the loans, it should be fine. However, proper financial planning should be done so as not to exceed your spending limit. Always keep aside at least six months of your monthly savings as your emergency funds. And when taking loans, we have to read the terms and conditions for different banks carefully. Different banks offer different rates. Compare and discuss with your partner or financial advisor. However, it is not recommended for anyone to take up personal loans to invest in stocks and shares. It is a risky thing to do that. Some people even go to the extend of withdrawing credit card loans and overdraft to invest in shares. We know that credit card loans incur high interest rates and it is not worthwhile doing that!
