When it comes to credit, many people only think of credit cards. However, there are actually three types of credit, and more variations of credit within each type. Those three forms of credit are loans, installment loans, and credit cards. They can all be obtained from a bank and other businesses in certain circumstances pertaining to the form of credit needed.
Loans allow a person to borrow money that must be paid back with interest. The amount of interest owed (also known as an interest rate) is specified in the contract from the lender. The contract of the loan will specify the time allowed to pay back the loan. However, in special cases like refinancing, deferment, or forbearance, the loan’s contract may be changed.
Loans may secured or unsecured. A secured loan is backed by an asset (like a house or car) that can be seized from consumers if they do not make payments on it. An unsecured loan does not require collateral and is given more to people with good credit scores who are less likely to default on it.
Installment loans are designed for a constant payback amount over a specified period of time. The payback amount is determined by the length of the contract, its interest rate, and the amount borrowed. These three aspects are highly dictated by the individual’s credit score.
Auto loans and mortgages are the most common examples of installment loans. These are usually repaid on a monthly basis or more when it comes to in-house financing through car dealerships. Regardless of how often a person pays, each payment reduces the loan’s balance.
Credit cards are arguably the most known type of consumer credit. Credit cards differ from personal and installment loans as they can be used continuously as long as the balance is within the credit limit. Therefore, consumers may continually use it to borrow money as long they continually pay the money back.
Credit cards, like other types of credit, are paid back with interest. The interest designated to be paid back on the credit card is known as its annual percentage rate or APR.
Credit cards are probably the best form of credit to have. They can have a strong effect on a person’s credit rating as they can be easier to pay down. This is due to the fact that credit cards can be obtained or borrowed for amounts much lower than loans or installment loans.
Credit cards, like loans, may be secured or unsecured. However, the asset required to receive a secured credit card is strictly money.
Loans are used to pay for expenses that consumers may not be able to cover in an immediate situation. A good example of a loan to cover a needed expense would be a student loan for college.
A loan may be secured or unsecured. A secured loan is secured by an asset. A common asset used to secure a loan is a house and at other times a car or other high valued equipment.
Installment loan for a new car
An installment loan is used to obtain needed items that a consumer may not be able to purchase with their own money. A good example of an installment loan would be an auto loan or mortgage loan.
Credit cards are the most known type of credit. The unique feature of credit cards is that they can be used continuously within themselves as long as their balance is repaid.
Cash money for a secured credit card
Giving a bank a specified amount of money is the only way a person can obtain a secured credit card. Most secured credit cards in the United States require a minimum deposit of $250.