Different Types of Loans and Credit

The concept of lending and borrowing money is as old as currency itself, as a good loan allows the borrower to finance something right away. That, or pay off debts that they may have. From Mesopotamia to medieval Europe and Asia to now, commercial lending has been a major aspect of any society’s economy, and today, commercial lending, mortgages, loans for businesses, and more are bigger and better than ever. That is, interested borrowers both commercial and private may find many options in their area for borrowing whatever sum of money that they need. Americans with good financial literacy may get the most out of a loan, and avoid some common pitfalls of commercial lending or borrowing. How can someone get a fair and reasonable loan for good purposes today?

Banking Services and Loans

Statistics are being kept to see how often American businesses and individuals take out loans, and why and in what amounts. Some of the most common arenas for private loans are for a mortgage on a house (home loans), getting a credit card, financing a vehicle, and student loans for college students. Choosing a bank or buying a home means knowing what sort of money you will need and how soon, and your credit score is another factor to consider here.

Most loan types aside from the likes of car title or hard cash loans involve the borrower’s credit score, or FICO score. A higher score is earned when that person has a good track record of paying off loans fully and on time, and a low score results from late or delinquent payments. A money lender may think “this person can be trusted with our money” when a borrower with a good credit score approaches them. Someone with a low score sends the message “I’m unlikely to pay back the money responsibly.” Therefore, young adults are urged to take out small loans, such as for credit cards with low maximums on them, and carefully pay off those loans in order to build a good credit score. Having no credit score at all may be concerning to money lenders, since that scoreless person hasn’t proven that they are responsible about loans. Some describe it as “no credit is bad credit.”

Auto financing is a common route for taking out loans. Most vehicles are too expensive for a typical customer to purchase outright, so auto dealers tend to be connected to a number of money lenders such as banks. A car buyer may get approved for a loan from any one of those connected lenders, and as with any other loan, a good credit score may lead to better (as in lower) interest rates (and better odds of getting the loan to start with). The total American auto loan debt is truly staggering, but that’s not a cause for alarm. Many Americans take out car loans to purchase a vehicle, and a car can be a fair investment if driven enough for work.

Many Americans will also approach mortgage companies to get a loan to purchase a property, if they are not looking to rent their living space. Here again, the borrower has better odds of getting a loan, and a good interest rate on that loan, if they have a high credit score. Mortgage companies might refuse to lend money to someone with a poor (or no) credit score. Meanwhile, many college students take out student loans to finance their higher education, and specialized money lenders may be approached for this. The total student debt in the U.S. today is in fact higher than the total credit card debt.

Commercial Lending

Companies also take out loans, and this includes freight carrier companies which make money when they charge invoices to their shipper clients. A small carrier company may have to wait awhile for that invoice to be paid, however, and other expenses will pile up. So, commercial lending in the form of invoice factoring may be done when a factoring firm is approached. This firm will collect the invoice’s full value in exchange for lending anywhere from 95-98% of the invoice’s value to the carrier company up front, so that the carrier can smooth out its cash flow. This is helpful for carrier companies with shallow cash reserves on hand.

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