Provided the array of frequencies at which socio- economic conditions and trends fluctuate and their effect on the economic requirements of private as well as corporate spheres, it yields a fertile ground for a diverse range of financing options. These financers are a vital source of funding for personal expenditure which in turn maintains the economy.
There have been a number of studies and surveys conducted over the years to determine the nature and effects of different types of credits or loans and how it impacts various factors. For example, one of the most common types of payment for everyday expenditure in the U.S. is paying by credit cards. This transaction is a form of loan being taken out by the borrower, or the individual making the purchase with their credit card. The collective amount that is charged to the relative credit account is paid at regular intervals. An interest is charged for using the card which is how the lender, the issuer of credit, makes their revenue.
This type of lending is commonly known as an open ended loan. It means that there is no pre- determined end to the issuance of credit and will continue until the agreement is cancelled according to the contract.
In contrast, mortgages and car financing loan agreements have a definite end: until the payment and added expenses are paid for in full for the product. This type of credit is a close ended lending agreement is secured against the property. This usually means that the financed property belongs to the loan provider until all the payments have been made in full. Until then, if the borrower defaults the payments, the secured property will be seized by the finance provider. However, finance providers generally have clauses in the agreement that allows concessions under certain circumstances. Under these circumstances a borrower might be allowed to pay just the interest instead of the coupled payment premiums for a time period, or a payment can be rolled over onto the next due date. These concessions allow borrowers some breathing space, if an unforeseen circumstance emerges suddenly.
Apart from the above mentioned broad categories of the lending systems, this article will tabulate the most common specific types of loans taken out by Americans and briefly expand on the nature of each of them.
Paying for transactions by credit card forms the largest personal open end loan system in the U.S., with about $730 billion worth of credit owed by the mid of 2016. Since this type of lending is not secured against any particular property or asset, it is classified as an unsecured loan agreement. A borrower uses their credit card at the point of purchase and pays the sum owed at the end of the month to the credit issuing company. Interest rates paid for using these cards vary depending upon the credit history of a customer and their financial situation. However, according to a market research company in the U.S., the average interest rate is about 15%, although this could be much more if the borrower has a bad credit rating.
A mortgage is a payment that a borrower pays to a bank or a financer who has made the full payment of the house to the seller. In this way, the borrower owes the money for their house to the lender and payments are spread out over a few decades as manageable premiums. At the end of the year 2016, U.S. mortgage payments that were owed to financers amounted to $8.36 trillion.
This type of borrowing generally has one of the least amounts of interest rates as it is a secured loan and house prices don’t depreciate nearly as quickly as that of, say cars. So, even though car financing and mortgages are both secured against the asset being bought, a car would depreciate quicker. It is explained by the Federal Housing Administration (FHA) as if after several years during the payment period the financer has to repossess the asset, the value of a house would be more or less the same depending upon the upkeep. The financer wouldn’t have a risk of losing much.
This brings us to car financing and the $1.1 trillion worth of current policies taken out till the end of 2016. A car payment is similar to a mortgage; a closed ended loan that is secured against the asset being purchased. However, as the life of a car is less than that of a house, the interest rate is considerably higher. Although, if a borrower does not have the funds to outright buy the car, they can spread the cost over several years with a car financing plan.
These loans form the bulk of lending transactions that take place across the U.S. Financing options like mortgages, car finance and others, allow borrowers to possess properties that would have been otherwise unattainable. This practice has become so common that it is now a norm for a U.S. citizen to have one type of finance running or another.