Curious about what retail loans include? We’re diving deep into the full list of consumer lending, from personal loans to auto financing.
Have you ever come across a dream purchase, like a vehicle that doesn’t magically produce a cool sound, a couch yet to be devoured by pets, or even a whole house, and thought, “My dreams are waaaaay out of reach?” I can assure you, you are not the only one to be put in that position. Turns out, this is where the world of consumer lending comes in. However, this is one world where the phrase ‘like reading a map in a hurricane’ comes to mind. Let us clear the air. In this post, I want to explain everything that retail loans entail. Consider this a no-frills, straight to the point style catering guide to the instruments crafted for us regular people. One loan at a time, we will unlock the entire toolbox.
As you might recall, a loan is the borrowing of money from a financial instutition. Each individual is only entitled to receive one retail loan from a financial institution. Creating retail loans is a means for banks and credit unions to aid people in financing their life milestones, big or small. Let’s dig deeper into retail loans and exhaust the list.
Personal Loans: The Financial Swiss Army Knife
In the world of loans, personal loans are the jack-of-all-trades. With a personal loan, you receive a lump sum of cash and can use it for just about anything. Need to consolidate your debts? Check. Need a vacation? Check. Unexpected root canal that costs a fortune? Unfortunately, check.
How it Works: Lenders typically offer personal loans as “unsecured,” meaning you don’t have to put up your car or house as collateral. However, this type of loan comes with higher interest rates. With personal loans, the interest rates are solely based on credit score. The higher the score, the better the deal. Personal loan lenders provide cash upfront, and borrowers pay it back in fixed monthly installments for the loan duration. Simple.
Auto Loans: Your Ticket to Ride
In today’s world, owning a car is a basic necessity, which is why auto loans are so prevalent. They are also the most popular form of retail loans available to consumers. With the wide availability of vehicles, a person needs to be financially stable to afford a car either new or used, for which they will most likely need an auto loan.
How it Works: In contrast to personal loans, auto loans are classified as “secured loans.” In other words, the car serves as collateral. Because of this, it usually comes with lower interest rates. On the flip side, if you stop paying for the loan, the bank has the right to repossess your car. You obtain the loan to cover the cost of the car, and it is paid plus interest over several years.
Mortgages: The Final Boss of Adulting
You are well aware of the “Big One”—the mortgage. This is the loan you take if you are buying a property. The only problematic part of it is the length; it’s a massive commitment, for about 15-30 years, so it’s a type of loan that’s terrifying and exhilarating at the same time.
How it Works: The mortgage is also a secured loan, so the process of getting one involves the house serving as collateral. For this, you will go through an entire saga that will involve appraisals, inspections, and tons of paperwork that is so monotonous, you will end up wondering what’s wrong with you. In exchange for that, getting the keys and feeling that comes with it is almost impossible to compare.
Home Equity Loans & HELOCs: Use Your House as an ATM
Once you gain equity on your home (which means you owe less on your home compared to its current market value), you could potentially borrow against it. This form of borrowing is powerful if used right.
How it Works:
A Home Equity Loan works just like a personal loan. You receive a lump sum of money, and pay it back in fixed payments over a period of time. Most people take home equity loans for big, one off projects like home renovations.
Home Equity Lines of Credit (HELOCs) operate differently. They allow you to withdraw against your limit. You are given a certain limit that you can withdraw during a specific time period called a “draw period”. This is extremely useful for ongoing expenses that are unpredictable in nature.
Credit Cards: Convenient But Dangerous Friend
You may not consider it as a loan, but using your credit card and not settling the balance will always amount to a short term, high-interest loan. Understanding this is important when it comes to understanding what retail loans entail.How it Works: The credit is “revolving,” which means you have a limit, can spend up to it, and as you pay it down, credit becomes available again. Users find it very convenient, but lenders charge fairly high interest rates, so you should use it carefully.
Buy Now, Pay Later (BNPL): The New Kid on the Block
Have you noticed the “Pay in 4 easy installments” option at the bottom of the screen? That is BNPL. Enrollment in it is instant and it is available at the point of sale, which is why it has seen rapid growth.
How it Works: With services like Afterpay or Klarna, you can divide purchases into smaller, generally interest-free payments. While it is a great option for smaller purchases, with multiple BNPL plans, there is a risk of missed payments and incurring fees.
That’s it! We have reached the last chapter on the retail loan landscape journey. Every step of financing your first car, or fixing your roof, each had their own tools. Now, the world of consumer lending is not as scary as it seems when you pull back the curtain. All you need to do is understand the concept of “loans.” They are not free money, but rather strategic tools for your needs. Remember the need for homework on your needs, before picking the right tool for your travel. Now, go and confidently achieve your goals.
