What are online loans? If you give an extremely brief definition they are short-term loans that do not need any credit checks. While that may be true, it is only half the story. Online loans are so much more than just short-term loans as there are several aspects. There are personal and business loans while there are secured and unsecured online loans, too. Other than those, you also have to be aware that online loans can have either fixed or variable interest rates.
In order to ensure that you understand the benefits and the risks associated with online lending, it is essential that you are able to simplify the terms. Here is a list of some of the commonly used online loan jargons, their definitions, and the differences between them.
1. Personal vs. Business Loans
Personal online loans are basically up to specified amounts that are used to address a personal need like paying the rent, the bills and even for emergency expenses. They are usually paid back very soon, in most cases on your next payday.
On the other hand business loans are approved because of the viability of a business plan. The amount borrowed will be used to start a business. The monthly payments can be considered as additional expenses for the business operation. As long as the business is doing well, the owner will not have to pay the online loan out of his own pockets.
2. Secured vs. Unsecured Online Loans
Secured loans are taken with collateral. Collateral is an asset that is used to guarantee the lender that you have a second source of repayment funds in case you cannot pay back the amount including the interest. Some of the most common forms of collateral are houses, cars, and any valuable pieces of equipment with a title of ownership. The value of your collateral may be higher than the amount borrowed, plus the interest.
Unsecured loans are the most common forms of online loans these days. They do not have any collateral and the lender will trust on the borrower’s promise to pay in time. In most instances, credit checks are skipped and the borrower will only be asked to divulge his complete personal and financial information. To prevent going out of business, companies offering unsecured online loans charge higher interest rates. Other than that, unsecured online loans are limited to a maximum amount set by the state and agreed by both parties involved.
3. Fixed vs. Variable Interest Rates
If you are looking for lenders, you will most likely come across the terms fixed and variable interest rates. Fixed interest rates mean that whatever amount you borrow, the interest rate will remain the same.
Variable interest rates offer flexibility because they can either rise or fall. If you have online loans with variable interest rates then you will also be allowed to make additional repayments, and therefore extend your debt term.
Now, when you hear the term “online loans”, you will no longer limit it to the common definitions. Additionally, with a broader understanding of the differences between these sets of jargons, you will certainly be able to make a more informed decision when it comes to online loans.