Loan talk: What it is and what you need to know about it

Ailene Amaro
Jan 15, 2018
Loan talk: What it is and what you need to know about it


To get to the very basics of loaning, let us first describe what it is: Loans are borrowing money from a lender and ideally using that money for a specific purpose. It may be to fund an emergency, pay the bills, buy a home or car and more. But loans aren’t as simple as that. There are actually different types of loans you can borrow, different types of credit and different loan categories. Don’t worry because we’ll be breaking everything down for you.

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There are two broad categories of loans which loans can be placed under: secured loans and unsecured loans.

  • Secured Loans:
    Loans where you put down some type of collateral to back the loan. Examples of this type of loan might be small business loans, mortgage loans, personal loans, etc. The advantage is secured loans often have lower interest rates.
  • Unsecured Loans:
    Loans where you don’t put down any collateral. The application for this type of loan is quick and you typically must have a high credit score to qualify. The downside is interest rates are higher.

Not all loans are equal in terms of how easy it is to get them. It’s a good idea that you familiarize yourself with what’s available, especially with regards to loans with low-interest rates.


There are two types of credit which every loans type fall under: open-end credit and closed-end credit. Open-end credit requires small monthly payments.

  • Open End Credit: Examples of this type of credit would be credit card accounts, home equity credit lines. You can use this ‘credit’ while still making payments against the total balance.
  • Closed-end Credit: Closed-end credit are loans given with a fixed amount; these loans are always used for something specific and there is a time period attached to the loan for repayment. Examples of this type of loan would be a mortgage loan, car loan, payday loan, etc.


A breakdown of the various loan borrowing options are the following:

  • Personal Loans: secured or unsecured loans given to an individual. Can be used for anything.
  • Payday Loans: short term loans with very high interest. These should be the loan of last resort if all other loan options have been exhausted.
  • Salary Advance Loans: get an advance on your paycheck from a credit union. Easy to get and less interest than payday loans. A good option if you have a steady income. A Payday Loan Alternative.
  • Student Loans: private loans used to pay for school. Usually some sort deferred interest and payment requirements until school has been completed.
  • Car Title Loans: a loan taken out based on the value of your car.
  • Car Loans: These are basically loans that you get to buy a car. You can approach the bank directly and seek to personal or auto loan to buy a vehicle.
  • Peer to Peer Loans: a new sort of loan where you borrow small loans from a community of lenders.
  • Home Equity Loans: loans taken out on the equity of your home.
Loan and taxes concept top view


Now that you’re familiar with the different types of loan, you probably already have a specific loan in mind that matches your need. Here are a few quick reminders before you take out that loan:

Check if you’re qualified for the loan

Whether you qualify or not for a personal loan will depend on your credit score. Almost all loans require credit check. Bad credit will get you high-interest rates on the loan or even flat denial of the loan. So, it’s a good idea to look at your credit score and see where you stand. If you have bad credit, we recommend you repair your credit and if you have debt issues, seek debt counseling.

Make sure you can afford to repay the loan

If you can’t afford a loan, you can’t afford a loan. So, don’t get any sort of loan that you will have problems making payments on. Absolutely look at how much interest you will pay, any associated fees for taking out a loan, the time allowed for repayment, etc.

Pay close attention to the loan terms – interest, repayment time, penalties

Remember that loans do require you to repay them, so you better read the fine print to see what you are getting yourself into. Paying close attention to the interest rate a lender is charging is extremely important when shopping for a loan. Early repayment penalties, or redemption fees, are generally charged when borrowers want to repay their loans before the agreed term to compensate the loan provider for the resulting loss of interest. A typical penalty could be equivalent to one or two months’ interest, although the penalties charged will often fall towards the end of the loan agreement.

Those keen to avoid redemption fees should look for flexible loans that can be paid off early penalty-free.

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