Financial blog. What are the types of payday loans: what are the main differences loans
To date, the various types of payday loans get along in the financial market. In order to structure them, financiers began to divide them into groups according to certain criteria, for example, according to the term of the agreement, the type of interest rate, etc. A lot of similar parameters are used, but among them there are several main ones.
The number of lending programs that banks offer to their customers is increasing every day. But knowing the parameters and properties of the payday loan product, it can be attributed to one of the categories.
Types of payday loans by term
The first simplest feature that determines the types of payday loans is their validity period:
- if the contract validity period is up to 1 year, then it is short-term ;
- All payday loans over 1 year are long-term .
Usually, short-term payday loans have the character of consumer, but long-term payday loans – people take to buy real estate and cars.
Credit classification by purpose
All types of bank payday loans are divided into:
Target payday loans provide for a strict control of the lender over the use of money, non-target payday loans enable borrowers to spend a payday loan on anything.
Typically, targeted payday loans are made to buy cars, real estate. They also include the kind of consumer payday loans that are taken to purchase a particular product or service, for example, home appliances, education services, etc.
What are the payday loans also depends on the purpose of their registration. The standard classification for this topic is as follows:
- consumer – they are taken by people in order to satisfy their consumer needs, for example, buy the necessary thing, make repairs, pay for a certain service. In most cases, these are not targeted payday loans, which means that people can spend money at their discretion;
- mortgage – this payday loan program is familiar to anyone who plans to solve their housing problem with the help of a bank. So called targeted payday loans for the purchase of real estate. Types of mortgage lending depend on the object of security: residential real estate (house, apartment), commercial real estate (office, shop, hangar, etc.), land plots. Also, mortgage means consumer payday loans secured by real estate;
- Car payday loans are targeted payday loans for the purchase of cars and commercial vehicles. With its help, you can purchase both new and supported vehicles.
What is the difference between a mortgage and a consumer payday loan?
The main differences:
- mortgage provides for the availability of collateral, consumer credit can be without collateral;
- Usually mortgage is the target form of financing (except for consumer payday loans). Where the money received on an unsecured consumer payday loan goes the bank does not check;
- mortgage programs for the purchase of real estate provide for the availability of such a parameter as a down payment;
- Purchase of real estate on credit is the most long-term product (executed for a period of up to 30 years), other forms of lending are for a shorter period (usually up to 5 years);
- The interest rate on home payday loans is one of the lowest, while the rest of the payday loan programs have higher fees.
Types of consumer payday loans
In turn, the following types of consumer payday loans are distinguished:
- card – provide binding of the credit limit to the main account. Using a credit card, you can make purchases or withdraw money in excess of your balance;
- cash – in this case, the client is given out money immediately through the bank’s cash office. To date, such payday loan products are almost never used. It becomes common practice for a client to get a plastic card with which he can withdraw money at an ATM or a cashier.
Types of security
There is another classification of payday loans and depends on what is a guarantee of fulfillment of obligations under the contract. This parameter distinguishes the following types of payday loans:
- without security or blank;
- with a guarantee;
- with real estate pledge
- with a pledge of movable property;
- with risk insurance.
Banks in order to reduce their risks may also require the client to apply for several types of collateral at once, for example: surety and real estate collateral plus insurance.
It should be noted that consumer payday loans in cash and credit cards are usually issued without collateral. If the desired amount is large, then the creditor may request a guarantee of one or more persons.
Let’s look at the types of payday loan security in more detail:
- Surety – having signed the corresponding agreement, the legal entity or individual agrees to fulfill the payday loan obligations jointly and severally from the borrower. In other words, if the latter ceases to pay under the contract, the bank requests that the guarantors repay the debt;
- a mortgage or mortgage of real estate – usually an apartment or a house that is acquired on credit, is a guarantee of fulfillment of obligations to the creditor. Also, the mortgage is issued when financing consumer payday loans for large sums;
- pledge of movable property – in this case, the bank takes transportation, money or metals in accounts, shares, etc., as a pledge to reduce risks. The most popular program, where there is a pledge of movable property is car payday loans:
- risk insurance – insurance services accompany almost every payday loan. So with a mortgage, the borrower must necessarily insure the property, for car payday loans you need to have a CASCO policy. Plus, banks can offer the debtor to insure themselves against the risk of losing their job, conclude a title insurance contract, etc. Thus, insurance ensures the fulfillment of obligations under the contract in the event of adverse events.
payday loan financing forms
There are types of payday loans according to the forms of financing:
- credit line;
- in one amount.
Credit line is renewable and non-renewable. The renewable line is quite often used for card payday loans. Its feature is the ability to use the credit limit again after repayment. It should be noted that interest is charged only on the actually selected amount of the credit limit.
You can get acquainted with the non-revolving credit line when you make a payday loan for the construction of real estate. This form of financing provides for the gradual use of credit funds over a certain period. In other words, the borrower does not immediately receive the entire amount, but in parts. Thus, you can save on interest, as they are charged on the actually chosen amount of the limit.
Unlike the renewable line, the non-renewable line does not allow the borrower to take the money again after the limit is repaid.
By its principle of operation, overdraft is very similar to a revolving credit line. But if the latter provides for the opening of an additional account for the client, the overdraft is convenient because it is tied to the main account.
Most often, overdraft is a companion of card accounts of participants in payroll projects. The advantage of this form of financing is that the borrower, when he needs to be able to withdraw from the account the amount exceeding the balance of his own money, and when the salary arrives, the payday loan is closed. You can also repay the debt by replenishing the card.
The mechanism of debt repayment on a credit line is somewhat different. Considering that the credit is recorded in another account, it is not enough for the borrower to simply replenish the card. He then must transfer the money from the card account to the payday loan account, otherwise the payday loan will not close in time and the bank will apply penalties.
Tranches are used for building houses. Here, the issuance of money is not a single amount immediately after the signing of the contract, but in accordance with the schedule. This form of financing is very similar to a non-revolving credit line.
Type of interest rate
In addition to the above varieties, there are types of payday loans by type of interest rate:
- floating – this means that the creditor has the right to review the contract fee at a certain frequency depending on the size of a particular index. Usually the last one is Libor, Euribor;
- with fixed – the rate does not depend on the value of monetary resources in international markets, and therefore can not be changed until the end of the contract term. Except in cases of penalties for violation of the terms of the contract.
As can be seen from the above, how many parameters are used in the credit program, there are as many types of payday loans. It should be noted that the lending market is constantly evolving, so there are more and more new types of payday loans and this classification is not complete. It simply lists all the main features of payday loans and their differences among themselves.