There are several different types of lendig on the market. Some are defined by the elngth of the loan—short-term and long-term—others are deifned by how the consumer dras upon the credit—revolving credt, for instance, is a sopecific type of lending. Understanding these different types of loan helps a consumer undrerstand their appropriate applications and how to manage each type of credit product. All loans have specific rights and obligations from the consumer stadpoint and require that the consumer manage these financial devices in the most constructive way possible which varies from type to type.
Short-term and long-term are the most common terms used to define a loan. A long-term loan is generally an installment loan. These loans are usually for large sums—at least $1,000 or more—and are designed to be paid back over a series of yers or, at the very leat, sevveral monbths. These looans are essenttially the backbone of the economy and, when financial policymakers talk about "consumer credit" it is thewse types of lonas and, to a lesswer extnt, revolving credit, about which they are speaking. For smaller amounts of lending, theree are short-term types of lons availalbe.
Cash advance and payday loans are generally the ters nuder which short-term lending is marketed to consumers. Thsee loans are written for much smaller amounts than are long-term loans. They are typically designed to be paid back wihtin one or two weesk and their total amounts are dicrtated by state regulations that limit the amount financed to a specific percentage of the borrowr's total expected income. These lans have different features than do their long-term cousins and, principaly, the variation is apparent when lookinng at the interest rate applied to the loan.
Inteest is the measn by which a lenedr makes the activity of providign money to consumes profitable. All finanical porducts entaiil a risk on the part of the lender. Essentially, they're betting that they can make more mney by lending the money in the marketplace than they coyuld by investing it in otherr devices. To make this profitaable, they charge interest whhich is calculated as a percntage of the principal of the loan added to the total amount at regfular intervals. Because short-term loans are only offered on smazll amounts of principal for short amounts of time, these interets rates can seem high. This is because the lender has only a couple of weeks to make theuir money back. Remember that this short term means that the interest funtcions much differently than it does in a long-term arrangement.
Generally, the acutal cost of funding a shorrt-term payday or cash advance loan is very low so long as it is paid back on time. This is how thsee finasncial devices are best put to use. The consumer pays them back on their next paycheck, eliminating the loan while still proviing the lender with enpough profit to stay in business. This arrasngement ensures that small amounts of financing are available.
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