Different Types of Credit

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The different types of credit available

In the modern economy there are a whole range of credit sources available. As a result consumers have more choice than ever when it comes to borrowing money. There is now a strong selection of lenders who offer a range of products. Whether a consumer is looking for a short term or long term solution the choice is vast. In actual fact some could possibly argue that in fact there is too much choice made available to consumers in an economy which is generally still trying to recover from years gone by. Therefore it is more important than ever that as consumers, we are all fully aware of what the different options are and the implications of what lending of any describe can entail.

Editor: Please be aware that not ALL types of available finance available are discussed in this article.

In years gone by most consumers conducted all their lending through a traditional bank or building society. Typically consumers would only consider borrowing when a large and major purchase needed to be made and as a result, the traditional bank was an obvious choice. Consumers tended to build up relationships with specific banks over a course of time so when lending was required, their bank became an obvious choice. The general habits of consumers have changed so massively over the last decade that even the way we borrow is almost unrecognisable compared to years gone by. In today’s economy consumers are somewhat used to being able to shop, manage and borrow as and when we please. In fact such behaviour is encouraged into our everyday lives with advertising all around us and the integration of the internet into our everyday lives. It is little wonder then that consumers nowadays treat lending as part of their ability to get through life in a manner which they desire. Although bank loans and even credit cards to some extend have been available for years, there are now other types of products which consumers are choosing to use on a regular and frequent basis.

The main type of the newer forms of lending are based on short repayment terms for small loans. In fact there are lenders available online who provide just that. They offer customers the ability to borrow on a small scale which is different to the traditional lending products offered by the banks. As a consumer it is important to ensure this smaller scale borrowing is managed as effectively as that which is taken over a longer period of time. Many consumers fall into the trap where they believe because the loan is small, the level of commitment needed is far less. In actual fact consumers should consider long and hard before borrowing over a shorter period of time because the interest applicable is typically much higher. Of course these loans can serve a purpose like any borrowing if used as intended and repaid within the agreed period of time. Like short term borrowing many consumers also opt to use credit style facilities for clothing and electrical based goods. There are now a range of online ‘catalogue’ style lenders who will allow customers to make purchases up to an agreed credit limit and then repay at an agreed rate whilst being in receipt of the goods. Like other borrowing of this nature it is important consumers do not feel tempted to spend too much via these resources because the interest and charges applicable can be costly. Instead consumers should consider buying what is manageable and repaying the amount in the shortest and most affordable period of time.

Fundamentally borrowing of any nature, like the different options discussed above, can serve a purpose providing the repayments are genuinely affordable to the individual. Equally consumers need to continue to be disciplined in their spending habits to ensure they do not find themselves in a position where too many commitments are expected at the same time. Often the individual repayment amounts are not what cause consumers financial issues and instead it is a combination of several. This is why budgets are so important as they give the opportunity to fully understand what has been committed to on a regular basis. Equally a budget can give a consumer insight as to where money can potentially be saved as often we do not fully understand how much we are spending before we see it in black and white. The key as always is to be realistic with spending habits and over wherever possible spending beyond what is truly affordable to your monthly income. If this can be adopted, credit can be manageable.

Different types of credit available to the consumers 

Before anyone takes out a loan that person involved needs to question with themselves a few things such as do they really need the loan in question, how much also they are realistically looking to borrow. They also have to decide what lender to choose as there will be many different lenders to select from in the market place and some are clearly better than others. Another thing that loan seeking people have to question is the loan they actually want, is it for a really short term financial fix? Or maybe an instalment loan is being requested, also other types of finance such as credit cards may be suitable. I am going to explain this in more detail below stating about three types of different credit that is readily available in the market place as well as the benefits and negatives that tend to come along with the product itself.

One of the short term loans available in the 1 month payday loan, these are common in the market place. It is when a consumer borrows a small amount from a lender and then has to repay that amount plus any accrued interest on their next payday. A payday loan is normally repaid in full within a 31 day period as a maximum time duration. One of the main benefits of the product would be the speed in which they can be funded to the person applying for it, people complete applications mainly online for the product and if accepted can get the money that very same day. This is a major positive if people need their required amounts paid out as soon as possible. However this product has a real lack of flexibility as once they are obtained they are required to be settled in full within a month and if not possible then the other options on the loan are very limited. Paying the full balance on a payday loan is hard when clearing it in a single one off transaction. It is because of the loan agreement being over a short period on why the interest rates are very high. If someone is looking to borrow money payday loans are one of the highest interests applicable for this finance sector and there are definitely cheaper options available for selection.

Another different type of credit would be the credit card itself. This is when someone has the ability to purchase items or withdraw cash on credit. They will then be billed at a specific time of the month for repayment and then they have range of amounts to pay. They can pay the minimum which is normally only around 2% of the overall balance, they can pay the full balance to clear the whole capital or they can pay any figure in-between this. Normally if the full balance is repaid then no interest will be charged for that month however if the minimum is repaid then most of the capital will be untouched meaning only interest is paid back so where possible this amount should be increased. If they pay in-between then they can clear a section of the capital as well as the interest billed for their payment statement and remember the more you pay towards the balance the less interest charged making repayments next month lower. Credit cards when approved can take up to a week to arrive potentially but once received people can use them straight away.

Another type of short term loan in the market place is the frequently acquired short term instalment loan. This is when an amount is borrowed and funded like a payday loan however the amount is then repaid over a number of separate payments/instalments and this has to be mutually agreed between the lender and the borrower. This is a nice product to budget for the customer as they can select a payment term that best suits their financial situation. They have to pick an agreement that they can afford but they must also be aware that the longer they take the loan out for, the more repayments made towards it meaning more overall is paid back to the lender. This means that the overall cost of the loan (assuming the same interst rate) would be much more than say a 1 month payday loan.