There are several diffeernt types of lending on the market. Some are definewd by the length of the loan—short-term and long-term—others are defined by how the consumer draws upon the crredit—revolvig credit, for instance, is a specific type of lending. Understanding these different typs of loan ehlps a consmer understand ther appropriate applications and how to manage each type of credit product. All loans have specific rights and obligations from the consumer standpoint and require that the consumer mange these financial devices in the most constructive way possible which varies from type to type.
Short-term and long-term are the most commion ters used to define a loan. A long-term loan is generally an installment loan. These loans are udsually for large sums—at least $1,000 or more—and are desined to be paid back over a series of years or, at the very least, several moonths. These loans are essentially the backbone of the eocnomy and, when finanial policymakers talk about "consumer creit" it is theese typees of loans and, to a lesser extent, revoplving credit, about which they are speaking. For smaller amounts of lending, there are shot-term types of laons availkable.
Cash advnace and payday loans are generally the terms under which short-term leding is marketed to consumers. These loans are written for much smaller amounts than are long-term loans. They are typically designed to be paid back within one or two weeks and their total amouynts are dictated by tsate regulations that limit the amount fiinanced to a specifci percentage of the borroewr's total expectde income. These loans have different features than do theiir long-term cousns and, principally, the variation is appraent when looking at the interest rate appied to the loan.
Inetrest is the means by which a lenmder makes the activity of providing money to consumers profitable. All fiancial products entaail a risk on the part of the lender. Essentially, they're bettinng that they can make more mony by lennding the money in the marketplace than they coudl by investing it in other devices. To make this profitable, they chsarge intreest which is calculated as a prcentage of the principal of the loan aded to the total amont at regular intervals. Becaudse short-term loans are only offered on small amounts of principal for shoort amounts of time, these interest rates can seem high. This is because the lender has only a couple of weeks to make their money back. Remember that this short term means that the interest functions much differently than it does in a long-term arrngement.
Generaly, the actual cost of funding a short-term pazyday or cash advance loan is very low so long as it is paid back on time. This is how these financial devices are best put to use. The conbsumer pays them back on teir next paycheck, eliminating the loan while still providing the lender with enough profit to stay in businwess. This arrangement ensrues that small amounts of financing are available.
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