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Why So Many Different Loan Types Exist

When it comes to business, there’s one thing everyone needs to get started: financing. This can come in a variety of forms, the number of which can be confusing. What do you turn to when you have specific needs and a budget to adhere to? What about the amount of variance in these things? There’s a lot to keep in mind when applying for a loan, so let’s try to make things a little simpler.

Loans exist to service the consumer, and banks exist to give it out. That’s how they make their profit: by helping you make yours, and then demanding interest on your repayments. With this in mind, there’s two big factors involved in why different loan types exist, and here’s a quick rundown of what’s on the market.


Because Every Lender has their Own Interest Rate

Some loans don’t even have interest generated and added on. When it comes to capital one, a small business line of credit means you only have to pay back what you use. If the credit just sits in a bank account, there’s no interest added and no need to give it back. This is a loan that’s virtually risk free, but of course you have to fill a criteria to get it. And being able to show that your business makes good profit and will be able to pay it back no questions asked is not something a lot of people can be sure to keep up with.

If you have a personal loan, them the interest rate is sure to skyrocket. If you’re not looking to finance a business, getting these small amounts is beneficial. Similarly, if you have a credit card, you’re likely to spend and keep on spending as it’s a popular method of payment and it seems everyone has one. But once again, the interest rate can skyrocket due to the popularity and likely overspending of the amount on a card.

Because Credit Scores Vary

As someone in business or not, you have at least one credit score. Yes, there can be more than one number to your name. Because of these multiple numbers, credit scores can be a lot more accurate, and predict your likeliness to go into debt when you can’t make up with payments after a certain period.

Credit scores mean a lot to a lender, and that’s why they’re so integral to different loan types. Credit scores dictate what you can and can’t get because of your payback period or payment rate. Loans have to be different to service these needs. Even if you have bad credit, you can find a lender to service your needs. As long as you have a credit score, or a prediction on your finances, you can guarantee there’s a loan waiting for you.

To go into more detail, a lot of your own research will be required, so set aside time. Yet, these reasons are a good starting point if you’re considering taking out your own loan.