Let’s Talk About Loans « Health Now, Wealth Forever

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By Gary, on March 1st, 2012

Not that I want you to go into debt.  But if you have loans, you may need a little understanding of the two types and how they work – either for you or against you.

As you probably know, a loan is a type of debt.  It is either a revolving type or an installment type.  Let’s define each type.

Revolving credit is a type of credit that does not have a fixed number of payments.  These loans are renewable up to a pre-set limit and paid down on a regular basis.  They are easy to get; they can be difficult to control; they can multiply like rabbits; and, the amounts you owe can balloon out of control.

You guessed it:  The most common type of revolving is the “unsecured” bank credit card.  (Note debit cards are not loans.)

It used to be that the revolving credit was issued by your clothing or department stores.  You probably remember the Sears card in your dad’s wallet that he used for tools or auto supplies.  Well – no more.  All such cards are issued by the big banks:  MasterCard. VISA, Discover, etc.

The big banks are not as service-oriented as your local department store was. If you miss a monthly minimum payment with the big banks, you are immediately hit with a penalty and your interest rate drastically increases.  Now they have you “forever”.

Even if you have the discipline to pay off your credit card and decide to cancel the card – BEWARE!  They have it set up so that even if you cancel the card, they will negatively ding your credit score.  Yep!  Check out at: Should you cancel your credit cards?

Installment loan is a loan that is repaid over time with a set number of scheduled payments. The term of loan may be as little as a few months and as long as 30 years.  A mortgage, for example, is a type of installment loan. A car loan is also an installment loan.

The installment loan takes more effort to get.  You will have to deal with the loan officer at your bank, fill out a financial statement, prove your income, and determine what collateral will be attached to the loan.  Collateral is usually the item you are trying to get with the loan:  house, car boat, business, etc.  Collateral can also be stocks and bonds, money market, savings accounts or similar.

These loans are usually obtained through your bank or credit union.  If you have trouble paying the payments, you can always go to that institution and work out something agreeable to both parties.

Once you have paid off an installment loan, the bank or credit union will send you a “paid-in-full” stamped on your original promissory note. They will also send you the title to the car, boat or house which releases their entire lien on the property.

Unlike revolving credit, when you pay the installment loan off, the bank gives you a positive report on credit report.

I hope this helps you in your future decisions concerning your wealth.