Money borrowed can be used for various motives, from financing the start-up of a new company to purchasing your spouse an engagement ring. However, with the different kinds of loans available, which one is the most suitable for what reason? Here are the most popular types of loans and how they function.

Personal Loans

Most banks, both online and located on Main Street, offer personal loans. The proceeds can be used for anything, from buying a new smart TV with 3D 4K to paying bills. This is a costly way to borrow money, as the loan is not secured, and the borrower does not have to put up collateral that could be taken in the event of default, like a home or car mortgage. A personal loan is available from a few hundred to several thousand dollars with repayment times of 2 to 5 years. The borrower must provide income verification and evidence of assets that are at least as large as the amount they are borrowing. The application is usually just a couple of pages in length. The approval or denial is usually granted within a few days.

Best and Worst Rates

Those with excellent credit scores and large assets can only access the highest rates. The worst rates must be endured by those forced to do so. Personal loans are the best option for those who must take out a small amount of money and know they can pay it back within some years. Personal loan calculators could be an effective tool for knowing what interest rate you can afford within your budget.

Bank Guarantee vs. Bank Loan

A bank loan isn't the same as a bank's guarantee. A bank could offer a guarantee as an assurance to a third party for one of their customers. If the customer cannot meet the contractual obligation in the agreement with the third party, the third-party could require payments from the bank. The guarantee is usually an arrangement between banks for their clients with small businesses. A business may be able to accept an offer from a contractor, for instance, under the requirement that the contractor's bank offers a payment guarantee in the event of a default by the contractor in terms of their contract.

Credit Cards

Each time a customer uses a credit card to pay is similar to getting a small personal loan. If the amount is paid in full on the first day, no interest is paid. If a portion of the debt is still unpaid, the interest will be charged each month until the debt is fully paid. According to the Federal Reserve, the typical credit card interest rate was 16.88 percent APR at the close of the final quarter of the year. This was a slight decrease from the second quarter of 2019 rate of 17.14%, but nearly the same as (16.86 percent) at the close of the year's fourth quarter. Penalty rates for customers who do not make one payment could increase even more--for instance, the rate is 31.49 percent on at least two HSBC Mastercards.

Revolving Debt

The main difference between a credit card and a personal loan is that the latter is a revolving loan. The card comes with a predetermined credit limit, and the owner can repeatedly credit up to that limit and pay it back in time. Credit cards are very useful, but they require discipline to avoid overindulging. Research has shown that people are more inclined to spend money using credit cards instead of cash. A simple one-page application can make obtaining $5,000 or $10,000 worth of credit much more efficient.

Home-Equity Loans

Owners of their own homes can take out loans against the property equity accrued. This means that they can borrow as much as they have. If the mortgage is half paid off, they may take out half the home's amount, or if the home has increased its value by 50% or more, they could borrow the entire amount. The difference between the house's current actual market price and the remaining amount due to the lender is what could be borrowed.

Small Business Loans

Most banks and the Small Business Administration (SBA) can obtain small business loans. They are usually sought out by those starting new businesses or expanding existing ones.

The loans are made once the business's owner provides the formal business plan to review. The loan conditions typically have a personal guarantee that the owner's assets will serve as collateral to protect against the possibility of non-payment in the repayment. These loans are typically extended for between five and 25 years. The interest rates can be negotiated.