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Understanding Closed-End Loan Options Available for Consumers

Are you in need of cash to buy an essential yet expensive item or to cope with ongoing financial expenses? If yes, then it is best to familiarize yourself with the different types of loans so that you can make an informed decision about taking out a loan.

To help you get started, Bonsai Finance will walk you through the variety of closed-end loan options available on the market.

Closed-End Loan Options

To begin with, a closed-end loan is taken out to finance a specific expense and for a specific time period. These loans are also referred to as installment loans because consumers have to follow a regular monthly payment schedule, including interest charges unless and until the principal amount is fully paid. Here it is important to understand that the rate of interest varies from lender to lender. It is closely tied to the credit score of the consumer taking out the loan.

Loan options include:

  • Mortgages

As most of the homes cost a lot more than what an average person makes annually, mortgage presents an easy loan option for potential home buyers to finance their purchase. Simply stated, mortgages are loans designed to make home-buying easier for borrowers by spreading out the cost over a specific period of time.

The 30-year fixed rate mortgage loan is the most common one. It is paid back in fixed installments on a monthly basis over a period of 30 years through a process known as amortization. These loans are distributed by banks.

  • Auto Loans

As the name suggests, auto loans are used for buying used or new vehicles. The loan term of this closed-end loan ranges between 24 months and 60 months. However, the good news is that longer auto loans with 72 and 84 months are now becoming increasingly common.  Although a longer auto loan may seem easy on the pocket, it is advisable to opt for shorter loan terms with larger down payments because of the fast depreciation of car value. However, it is important to know that if you’re unable to make auto loan payments and you end up defaulting, then you may put yourself at the risk of losing your car altogether. Therefore, only opt for a loan payment plan if you can make timely monthly payments.

  • Payday Loans

Payday loans can be best described as unsecured cash advances that are available for small amounts of money on short-term repayment demands and with high interest rates. The loan amount is usually less than 1000 dollars.

These loans are designed to help borrowers make their ends meet by bridging the gap between one paycheck to the next one. Payday loans are ideal for those people living paycheck to paycheck. Most people use the loan to cover essentials, such as utility bills, food, rent and medical expenses. These loans are linked to the borrower’s paycheck.

Payday loans are available online or at different storefronts. Lenders offering payday loans use different methods to calculate interest rates and can often demand nearly 300 to 400 percent on an annualized basis.

According to the CFSAA (Community Financial Services Association of America), there are nearly 18600 payday loan operators countrywide extending approximately 18,600 billion in credit to roughly 19 million households. What’s appealing about this loan type in particular is the fact that it is simple to borrow and offers easy access to cash to those who have no or very little access to conventional credit.

Getting these loans is quite simple. All you have to do is walk into a store with your pay stub, a blank check and ID (like your driver’s license). The store clerk will offer you a small amount, which can be between $100 and $500. This amount will be due when you’ll get your next salary. However, it is important to understand that you’ll have to commit to paying a reasonable amount. For example, 15 dollars for every 100 dollars borrowed.

Furthermore, the lender of a payday loan will ask you to provide them with a post-dated check. This will be used to cover the loan plus fee. But, some lenders may ask you to provide them with an authorization to your bank account so that they can withdraw money electronically from it when the due date arrives.

  • Personal Loans

This is the most versatile type of loan available for consumers in the lending market. While auto loans and mortgages are basically used for specific purposes, personal loans can be used for different purposes, such as for debt consolidation, vacation, daily expenses, and even for credit building. In other words, personal loans don’t have a designated purpose and can be used for any type of personal expense.

Depending on the lender, a personal loan can be either unsecured or secured. However, loans that are not secured by collateral may be available at a higher rate of interest as they may be riskier for lenders. Thus to cushion themselves from potential losses, they may charge you more.

As personal loans are not designated, this makes them extremely appealing for borrowers with outstanding debts like credit card debt. In such a situation, the borrower can take out a loan to reduce their interest rates pertaining to credit card debt by transferring balances. Also, another factor that makes these loans attractive is the fact that most personal loans lack collateral so unlike auto loans and mortgages, you don’t have to surrender anything in case you default. The lender simply relies on the borrower’s integrity to repay the interest and loan principal. For this, a thorough background as well as credit check of the potential borrower is carried first to assess the risk factor.

Now that you have complete information of the most common closed-end loan options available on the market, we are sure that it will be quite easy for you to determine which loan is the best for you. By taking out loans, you can buy whatever you want and make your ends meet without any financial constraints.  


Doug Sandler