Types of Loan Programs
 
 

Types of Loan Programs

The five major categories of loans are as follows:

  1. Mortgages.
  2. Automobile Loans.
  3. School and College Loans.
  4. Small Business Loans.
  5. Personal Loans.

In this article we will highlight the varied types of loans found under each of the five major categories.

Mortgages

Mortgages are among the most prevalent types of loans. In fact, mortgages comprise such a large portion of the American economy and the United States is faced with over $7 trillion in outstanding mortgage related debt.

Hence, you can gather why the media has focused so heavily on the mortgage industry. For not only do they constitute a great deal of the market activity but also their associated interest and payback rates signify a great deal about the overall economy.

Mortgage financiers are required to adhere to regimented governmental policies regarding lending practices. Yet, within these parameters, based upon the client's needs and financial background, there are a host of mortgages from which borrowers can choose.
ARMs
The most popular type of mortgage loan is that of the Adjustable Rate Mortgage (ARM).

Essentially, ARMs (also known as variable rate mortgages) are loans with interest rates that fluctuate. With ARMs, the interest rate changes periodically, usually in relation to an index with payments going up or down in tandem.

With ARMs the important points to bear in mind are as follows:

· Monthly payments are volatile; the amount one pays month to month is apt to change over time.

· Should interests rates go down that does not necessarily mean a borrower's payments will also go down.

· Should interest rates go up that does not necessarily mean a borrower's payments will also go up.

· It is entirely possible that the borrower could wind up owing more money than they borrowed, even if all the payments are made on time.

Fixed Rate Mortgages

With fixed rate mortgages, the interest rate remains consistent over the length of the loan. As compared with adjustable rate mortgages, fixed rate mortgages are a less risky type of loan. Fixed rate mortgages are setup to lend funds at a specified rate of interest for a specified number of years. Traditionally, people elect to take out fixed rate mortgages for such periods as 10, 15, 20, 30, 40, and 50 year terms.
The overriding benefit of fixed rate mortgages is that they eliminate the risk of additional expenses should home interest rates fluctuate dramatically.
Interest Only Loans

As the name would apply, interest only payments do not contain principal. Rather, a good number of the interest only mortgages in today's market feature the option of making only interest payments. Generally, the interest only payment portion of the mortgage is limited to a specified period of time, for instance, the first five or ten years of the loan. Subsequently, the loan is amortized over the remaining length of the term. As such, while the loan balance remains the same, the payments switch to an amortized* amount.

Note: A mortgage is amortized when it is repaid with periodic payments over a particular term. While certain portions of each payment are applied to the interest on the debt, remaining balances are used to reduce the principal.
Low Doc and Bad Credit Loans

Delving into a more questionable area of home lending known as predatory lending, these types of mortgages tend to be associated with higher fees and interest rates. The higher fees and rates are considered necessary in order to offset the added risk to the lender as posed by the borrower whose credit and financial history may be less than stellar. For many people with low or poor credit, low doc mortgages are the only way they can afford their own home.

Automobile Loans
In the basic sense, there are two types of auto loans: new vehicle loans and used vehicle loans. The idea to keep in mind with the automobile finance industry is that brand new cars lose their value as soon as they are driven off the lot.

Hence, used car loans are considered more cost effective than new car loans because used vehicles don't depreciate as dramatically as new cars do.

For the most part, dealerships have their own financing department. As a loan officer this may be an environment in which you desire to work, as often times there are a range of different lending products from which to work.

Alternative financing routes available to consumers include lending from a bank, credit union, or other outside lending institution.
Direct and Indirect Auto Financing

With respect to the sourcing of automobile loans, when obtaining a loan (in the form of a cash voucher or draft approval) from such an alternative lender, it is referred to as "direct financing" for the buyer is getting funding directly from a financial institution, for example, a bank or other creditor.

Indirect financing is when a buyer secures their funds from the dealership's finance department.
Car Shopping or Car Financing? Which comes first?

For those in the market to buy a car, lenders will forewarn that is better to first obtain financing and then to shop for the vehicle. This is because the buyer may only be granted a certain amount of credit and they will only be disappointed if that amount does not adequately cover the car they had their heart set on owning.

School and College Loans

For students seeking ways to finance their undergraduate and/or graduate degrees, due to the large amount of money that is required and the varying types of school and college financing on the market, obtaining a school or college loan can feel like an overwhelming task.

For loan officers who elect to either specialize in this area or at least offer these types of loans, it is important to understand the diverse funding sources that exist.

The predominant source of funding for school or college loans is the government. Second to the government, a university finance office tends to comprise the next largest sector of school or college lending.

Generally speaking, these two types are categorized as federal and private loans (they may also be referred to as alternative student loans or personal student loans).

As compared with private loans, while there are numerous benefits associated with federal loans, lower interest rates (with some types having the government paying students' interest while in school), greater buyer protection, more flexible repayment structures, there are also such unfavorable aspects as capped values (loan amounts), more competitive lending qualifications, and more rigorous application processes.

Examples of federal school loans include:

1. Stafford Loans and Federal Stafford Loans. These loans are awarded based upon financial need; these types of loans (as the name would imply) are regulated by the Federal government. Students may obtain these types of loans from a bank, credit union, or even directly from the government.

In brief, there are three kinds of Federal Stafford Loans available to prospective students:

A. Subsidized Federal Stafford Loan, This is described as long term and need based; this type of loan is accompanied by a low interest rate. The term subsidized is used for it indicates that the government will assume responsibility for paying the interest on the loan while a student is in school or should the student request a period or deferment.

B. Unsubsidized Stafford Loan. This loan is also described as long term and accompanied by a low interest rate; the point of distinction among non-subsidized Stafford loans is that they are allocated on a non-need based protocol. Hence, this type of loan is ideally suited for those students who fail to qualify for other types of financial aid, or find that they are still financially short despite having obtained other forms of financial aid. The majority of household incomes qualify for these types of loans, yet the fact that they are unsubsidized means that the borrower is responsible for paying the interest on the loan.

C. Additional Unsubsidized Stafford Loan. As determined by Federal guidelines, the additional grouping of unsubsidized Stafford loans encompasses borrowers classified as independent students.

2. Perkins Loans. Perkins loans provide incredibly low interest (5 percent) loans to undergraduate and graduate or professional students who demonstrate extreme financial need. These types of loans are funded in part by new federal capital contributions (FCC), institutional contributions, and loan repayments from prior borrowers. Interesting to note, the funds provided by the FCC are matched 25 percent by colleges and universities. Eligibility requirements for individuals applying for a Perkins loan include the following qualifications:

· Enrollment in an eligible school where 50% of the student's time is spent in a degree program.

· U.S. citizen or classified as a permanent resident or an eligible non-citizen status.

· Student continues to attain (at minimum) satisfactory grades and make adequate progress toward their degree

· Not found to have any unrequited debts or defaults on previous Title IV educational loans or grants

Additional federal student loans include: Federal Parent PLUS loans and Federal Graduate PLUS loans.

· Parent PLUS Loan is a type of federal loan that is offered to parents who have dependent students; the Parent PLUS loan, though, used to supplement the student's financial aid package is repaid by the parent. PLUS Loans are based upon a fixed interest rate that is established by the Federal government. Granting of loans is based upon the candidates' abilities to pass federal guidelines for determining creditworthiness.

· The loan repayment phase usually begins within 60 days after the funds have been provided with an extension of ten year's time for the parent to finish repaying the entire loan. Because there is not a grace period on PLUS loans, interest begins to accrue immediately.

· Graduate PLUS Loan is a type of federal loan that allows individuals to borrow money for the purpose of financing their post-graduate education, graduate PLUS Loans work quite similarly to the Parent PLUS Loans. The difference, however, is that rather than being based upon financial need, the amount one can borrow reflects the individual's impending educational costs. These types of loans have fixed interest rates and generally need to start being repaid within 60 days of the receipt of funds.

Private Student Loans

As a loan officer, although you may not be personally responsible for administering the aforementioned federal loans, it is still important that you are familiar with them.

Although educational loans are available, your forte, however, is likely to be the facilitation of private loans. Backed by private lenders, such as banks, these types of loans tend to be used as gap fillers, when a gap exists between the tuition cost to attend a particular school and the financial aid or federal loans which have already have been obtained.

The major reasons why people use private loans for educational purposes include:

· Inability of government based student or parent loans to provide sufficient financial coverage.

· Federal loan repayment options lack the amount of flexibility needed by the borrower.

· Private loans have higher caps on their loans (as compared with federal loans).

Note: The major downside of private educational loans is that they tend to have higher interest rates than their federal loan counterparts.
Small Business Loans

Necessary to edge out the competition and stay afloat in a turbulent economic time period, small business loans can be used for anything and everything, from renovating an existing business to refinancing of existing business debt so long as the following elements are in place:

· Borrower has satisfactory credit history.

· Owner intends to remain actively involved in the management of the business.

· Business is able to show an acceptable debt to net worth ratio and adequate cash flow.

Types of Small Business Loans
Once deemed as eligible, the business owner can then determine which of the two most popular types of small business loans will best serve their needs: short term or long term.

The benefit of short term loans, which tend to reach maturity in a year or less, is that they can safeguard a business owner during the down periods. Short term small business loans tend to take on such forms as revolving lines of credit, working capital loans, and accounts-receivable loans.


The upside of long term loans is that, for the most part, they mature between one and seven years (may be longer for real estate or equipment purchases). Long term loans are often used to purchase vehicles, facilities, construction, and furnishings.

Personal Loans

The two most common types of personal loans are secured and unsecured.

The primary distinction between secured and unsecured loans is that the former (secured loans) are backed by some form of collateral whereas the latter (unsecured loans) are not.

While seemingly simple, secured loans, because there is something of value at stake, tend to be viewed as less risky. Should the borrower end up defaulting on their loan, the lender may assume ownership over the asset in question.

With unsecured loans, however, because there is nothing backing the loan, there is greater associated risk. Lenders typically grant unsecured loans after having carefully reviewed the borrower's credit history and assessed the likelihood of the individual satisfactorily repaying the loan.

With regard to types of personal loans, unsecured loans are reported as being the most popular type of personal loan. Coming as somewhat of a surprise, for accompanying these types of loans, borrowers are charged higher interest rates to offset the risk potential.

In terms of structuring personal loans, the most popular one is a specified amount that is borrowed for a stipulated period of time and, using installment payments with applicable interest rates, is paid back in full through the installments. For this reason, personal loans are also commonly known as installment loans.

While the amounts available under personal loans vary widely based upon the lending forum and the borrower's financial history, the general rule of thumb is that the applicant's capacity to repay the loan determines the maximum amount, as well as, the interest rate.
 
 
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