A Closer Look at Borrowing
In borrowing money we typically chose from two specific types of loan: open-end and closed-end credit. Because it allows you to borrow up to an authorized limit on a continual basis, open-end credit is often referred to as a revolving credit or an open credit line. Credit cards are examples of a revolving credit line as are home equity loans.
The key to recognizing the immediate differences between the two are that revolving credit loans do not have a fixed number of payments. Installment credit (like an auto loan, mortgage, or student loan) typically include a payment book in which the balance of the loan is decreased in regular increments.
What about other types of loans such as a Payday Advance service? In a payday loan scenario, the lender is often literally a check-cashing firm that lends cash to a borrower for a fee. The borrower in-turn writes a check to the firm for the amount of cash they desire plus the fee charged for the service and the lender holds onto the check until the borrower’s next payday.
Mortgages are typically broken down into three primary payment categories:
Fixed rate mortgages- This is a situation in which the interest rate and the payment amount remain the same throughout the life of the loan.
Graduated payment mortgage- A mortgage with a fixed rate in which the payment amount is variable.
Adjustable rate mortgage- Both the rate and the payment amount are variable.
This is all important to the debt management process as understanding repayment procedure (including fees) is invaluable in determining whether you can afford to borrow money. The key when considering taking out any kind of loan is to weigh the pros and cons of the terms and conditions presented. Often times loan conditions that appear to be a bargain come with stipulations (such as shorter repayment terms).
