Loan types: what types of consumer credit are there?Uncategorized
What forms of consumer credit are there?
If you want to borrow money, you can choose from a very large number of loan types. Think of a mortgage if you want to buy a house or a car loan if you want to buy a car. This site specifically concerns consumer loans that you as a consumer can take out from a lender.
What is a consumer loan?
Loans come in many variants, but in the end it all comes down to: you borrow money, you pay interest on it and you have to repay (periodically) immediately or at a later time. A consumer loan is a loan in which the money is used for consumer spending. Think of a loan for buying a car or giving a wedding or a loan that you take out to get some more spending space. Consumer loans come in two basic forms: the personal loan and the revolving credit.
Differences between revolving credit and personal loan
The main differences between a revolving credit and a personal loan are the flexibility and type of interest. With a revolving credit you can withdraw repaid amounts up to the original loan amount. That is not possible with a personal loan. If you want to borrow again with a personal loan, you must apply for a new loan. This makes the revolving credit more flexible than the personal loan.
Another important difference is the interest. The interest is variable with a revolving credit. In theory, this can change daily. With a personal loan you have a fixed interest for the agreed term. So with a personal loan you know exactly where you stand.
Types of revolving credit
The most well-known revolving credit option has already been described above, but also a credit card and buying on credit from a store is usually a form of revolving credit. In these forms, too, there is often a credit limit where you can withdraw already repaid amounts.
Types of personal loan
Personal loans include loans that you pay off monthly and where you know exactly when the loan has ended. This form is often used for the purchase of products whose value decreases quite quickly. Think of a car. A personal loan is therefore also referred to as a car loan. But a personal loan can also be useful for the purchase of goods such as a kitchen or washing machine or for financing a holiday. As soon as the car, kitchen or washing machine is due for replacement, you are off the loan. A pleasant thought.
You can also use a personal loan to finance renovations to your own home. The characteristics of the PL meet the requirements for the mortgage interest deduction, making the interest you pay deductible for income tax just as much as that of a mortgage.