Credit basics and its types for first time borrowers
What is Credit?
Credit is the amount of money that you borrow. Once you borrow, you are under obligation to repay back the loan within a certain period of time.
Types of Credit:
You can borrow money through several ways. Some of them are listed below:
Loans: These are the amount of cash that you borrow. Loans can be small or large depending upon an individual needs. Basically, there are two types of loans secured and unsecured loans.
Secured loans:A mortgage is an example of secured loan. In this type of loan your property or assets act as security. You can negotiate with your creditors for a reasonable rate of interest. However if you miss the payments, your property can ceased by the lender.
Unsecured loans:These types of loans do not require any security or mortgage. The repayment period for this type of loans can between 6 months to 10 years.
Overdraft:It is a facility given to you by your bank whereby you can withdraw certain amount of money from your current account up to an agreed limit. It is regarded as an efficient form of borrowing because, you need to pay the interest only for the time period you use the amount. You can deposit the money anytime to reduce the outstanding balance. There are no restrictions for you to withdraw the amount as long as you do not cross the agreed limit. In this type of credit, the interest is charged at the end of the month on the outstanding balance.
Service Credit:This type of credit is the monthly payment for utilities like gas, electricity, water, telephone etc. You need to pay certain amount of deposit, and if you fail to make the payment on time, you will have to pay late fines.
Hire- Purchase agreements (H-P):In this type of credit you partly pay off the loan and partly rent the item. It means that you can hire the goods till you make the final payment. Usually this type of credit takes longer time to pay off and you end up paying more than the original cost of the item. This is usually offered on cards and musical items.
Installment Credit:It is type of credit that is granted on a condition that the amount will be repaid at regular intervals within a certain period of time.
Credit Cards:These are usually issued by credit card companies, retail stores or banks. They can be used to buy goods on credit or obtain money from banks. At the end of each month you get a statement stating the amount you owe and you will have to pay the minimum amount for that respective month.
Mortgages:Mortgage represent loan in which there is legal contract between the borrower and the lender for a certain amount of money on a property or an asset. This has to be paid off over a specified period of time. If the borrower fails to pay the loan within the due date then the property or asset can be ceased by the lender.
Pawn broking:This is one of the traditional forms of lending money. You give your valuables to a pawn broker and they lend money to you for few days. You need to pay the money to get back your valuables. If you fail to do so the pawn broker keeps your valuables.
Apart from these types of credit, the other types are credit sale, agreements with finance company, conditional sale, charge cards, credit brokers etc. The need for credit varies from person to person. So, is important for you to know the core terms of credit industry in order to go for the loans which will be suitable for your needs.