You have to know better the common forms of consumer credit if you want to choose better the most useful and affordable personal loan.
Consumer credit is money, goods or services provided to an individual in return for a later payment. When you shop for the best solution to finance your projects or just personal needs, are you looking only for the best personal loan interest rates? Be careful, you have to check also the relation between your particular needs and the type of loans available. For example, can you finance your college fees from a credit card, just because the loan interest rates on such short term personal loans are the best? Of course, not.
Common forms of consumer credit include
- Credit cards
- Store cards
- Auto Financing
- RV Financing
- Education Loans
- Personal loans
- Credit lines
The main types of consumer credit are based on the collateral: Secured Loans / Unsecured Loans.
Secured loans are loans for which the borrower is required to guarantee repayment, by pledging with property, for instance a car, a house etc. This property is called security or collateral. Because of the pledging, secured loans are given in larger amounts and have lower interest rates. However, there is a risk of losing the property used as security, in the event that the loan is not paid off.
Unsecured loans are loans that are given without pledges of repayment. This means that the borrower is not required to provide security to get the loan. Because of the high risk involved, unsecured loans are given out in smaller amounts and have higher interest rates. The lenders raise the interest rates in an effort to recover their money as quickly as possible. Most personal loans are unsecured loans.
A personal loan is a ‘small expense’ loan that is mostly used by people to finance their day to day emergencies. Most of these come in smaller amounts and therefore, just like most unsecured loans, they are easily approved. When you’re inside this loans category, providing your credit score is OK and your debt to income ratio looks good, the proper way to choose the best option is by opting for the best personal loans interest rates.
Main categories of consumer credit by major holders
- Depository institutions (financial institutions – savings banks, commercial banks etc legally allowed to accept monetary deposits from consumers);
- Finance companies (also called Commercial finance companies or Consumer finance companies – and means companies and organizations legally allowed to make loans, but not being allowed to accept monetary deposits from consumers);
- Credit unions (member-owned financial cooperative, controlled by its members and operated on the principle of people helping people, providing its members credit at competitive rates as well as other financial services);
- Federal government (includes student loans originated by the Department of Education under the Federal Direct Loan Program and the Perkins Loan Program, as well as Federal Family Education Program loans that the government purchased under the Ensuring Continued Access to Student Loans Act);
- Nonprofit and educational institutions (includes student loans originated under the Federal Family Education Loan Program and held by educational institutions and nonprofit organizations);
- Nonfinancial business;
- Pools of securitized assets (the process of securitization creates liquidity by enabling smaller investors to purchase shares in a larger asset pool. It can involve the pooling of contractual debts such as auto loans and credit card debt obligations, or any assets that generate receivables).
Within the category of personal loans are also included
PayDay loans, one of the well known and common forms of consumer credit, is a form of credit granted for a very short period of time. The amount of a payday loan is very small, and the interest is usually quite big. Is probably the most expensive form of consumer credit, so if you can choose other types of personal loans, do that.
Title Loans truck
Title truck loans, also know as personal loans on car title, is a special case of secured personal loans. The collateral used to grant such loan is the title of your truck or your car. During the loan period, you can still use the vehicle.
Banks Personal Loans
Quite easy to get one, bigger amounts than all other common forms of consumer credit, cheaper too. And granted on significantly longer periods. So why is anyone getting something else? Not everyone is approved by banks (for credit score reasons.. etc).
In this type of debt are not included those debts contracted for the purchase of real estate or margin investment accounts. For example, a mortgage to buy a house is not consumer credit. But can you borrow money in small amounts for financing a personal project or just a consumer need, against a mortgage? Yes, you can do that, so the main way of differentiate various loans is basically done by analyzing the purpose of the loan use.