Different Loan Types To Loan You Out of Money Crunches

Thinking of buying a new house? Son, going for university education? Running short on cash for any other reason? Then you will need loans to deliver you out of your cash-starved situation. And when you are going in for loans, it will do you good to be well aware about the various types of loans that you can lay your hands on.

Loans Where Interest Rates Come Into Play

Loans can be categorized on the basis of the interest rates involved in them. Thus you have the Fixed Rate loans or mortgages (FRMs), which are actually kinds of mortgage loans wherein the interest rate remains constant throughout the entire length of the loan period, which may be anything between 15 to 40 years. This just happens to be the most preferred option amongst a huge number of loan seekers who appreciate the fact that with this kind of a loan there is a fixed monthly payment that in turn makes for easier budget allocation and expense plans.

However, the prime appeal of fixed rate loans is that since the interest rate is the same all throughout, you don't have to worry about having to make astronomical monthly payments during times of inflation.

At the other end of the spectrum, you have the Adjustable Rate Mortgages (ARMs). With this type of loan you have a variable rate of interest to contend with. The interest rates are dependent on various parameters like index of treasury securities, and with changes in this index, the interest rate fluctuates. But there's no reason to feel insecure, as there are cap limits to prevent the interest rates from spiraling out of control should there be severe fluxes in these deciding factors. These caps will keep your interest rates within bounds both during a year and also throughout the period of the loan, whence the caps are set at 2 and 6 percent respectively. So there's actually no need for you to shun Adjustable Rate loans. And what is more, the introductory interest rates tend to be low with these loans.

You have the Graduated Payment Mortgage (GPM) loans, which are akin to the Adjustable Rate loans. In this loan type, you start off with a relatively low interest rate, and then graduate to higher reaches over a stipulated time period. These loans are mainly targeted towards the young generation who cannot handle hefty loans right at that moment but have shown glimpses of a financially stable future where they can afford to make big payments.

Growing Equity Mortgage loans (GEMs) may sound somewhat similar to the GPMs, but differ in the fact that in case of the former, you may increase payments over time but this only serves to reduce the burden of the principal. This means that with this loan, you can even pay off a 40-year GEM loan even within a short span of say, 20 years.

Hybrid loan is another type of loan that is slowly gaining popularity amongst the loan seekers. As the name speaks for itself, hybrid loans are a cross between fixed rate and adjustable rate loans.

To elaborate, in the initial stages of the loan period, the interest rate is kept fixed, only to be transformed into an adjustable rate after a specific period of time. For loan seekers wishing to go in for this kind of a loan scheme, it is however, imperative that you enquire after the exact magnitude of change in the interest rate once the loan takes on the form of an adjustable rate loan. This is important considering the fact that there are very few hybrid loans that come with caps to check the interest rates from going haywire.

With the hybrid loans, there is a tendency to feel tempted by the amazingly low introductory interest rates. But it is worth knowing that interest rates do go on an upswing once you move out of the fixed rate loan phase.

Loans That Don't Take Interest Rates Into Consideration

In this category you have the myriad types like the Balloon Payment loans, the conventional type and the Federal Housing Authority (FHA) and Department of Veteran Affairs (VA) loans.

The Balloon Payment loans are where you can pay a lion's share of the loan amount towards the end of the loan period. To be precise, these loans may be short-term loans but the payments are calculated on a long-term basis.

The conventional loans come from the stable of the private moneylenders. The best thing is that if you are in need of an unusually large amount of loan or have a poor credit history that prevents you from approaching a financial institution like a bank, then you can go in for this kind of a loan. There is no upper limit to the sum you can borrow.

FHA and VA loans are actually home loan packages with low qualifying ratios for people who in some way or the other are not eligible for the conventional type of loan schemes. These loan packages also have very little or no down payment. But to explain a myth, the Federal Housing Authority and the Department of Veteran Affairs are not loan providers in the strictest sense of the term. They rather insure the loan amount, which the loan seeker can avail from an outside lender.

Knowing about the various types of loans and their relative pros and cons will only help you secure a deal that would promise well for you.-------------------------------------------------------------------------------------------
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