What is a Conventional Loan?

Definition of Conventional Loan

A conventional loan is a type of mortgage, but not insured or guaranteed or backed by the FHA or any governmental agency for that matter. The rate and terms are pre-defined and fixed.

Purpose

There comes a time in all our lives when you would be considering taking a loan from a bank. There are a lot of different conventional loan which you can choose from, and all of them have their own sets of pros and cons. These include a number of different types such as secured loans, signature loans, mortgages, car loans, and so forth.

You should certainly weigh pros and cons of each of these loans and how they can fit perfectly into your financial plans. If not perfectly, close to it. You will also need to work out your budget accordingly. Every lending institution will have their own list of requirements for you to fulfill before you can acquire the loan which you’re seeking.

Types of conventional loans

Loans fall into a couple of blanket categories, secured and unsecured.

Secured loans

Secured loans are also called collateral loans. Here, collateral has to be offered in exchange for a loan. In the unfortunate event of the person not being able to repay their loan to the bank, this collateral will be sold by the bank in order to recover their money.

Banks are known to accept various types of collateral such as property, stocks, bonds, and even valuable items such as jewelry. Other types of collateral are title deeds for houses or cars which a bank can seize until you fully repay your secured loan. If you pay off the loan in prescribed manner then you do not have to worry about this happening.

There are other times when co-signers or co-borrowers offer collateral on the behalf of a primary borrower when they are not able to produce sufficient assets to secure a loan. One other type of loan which borrowers can consider as home equity loans or home equity lines of credit.

This loan is based on the equity you have minus the balance which is payable on your mortgage. The biggest advantages when you get a secured loan is that the interest rate will be lower and it’s much easier to get.

This is because lenders are more willing to loan you money when you are offering assets or collateral like home equity. The risk here, of course, is that you will lose your collateral if you aren’t able to repay your loan as promised. Whenever you make such a decision, you need to understand the pros and cons related to going the conventional loan route. You should also have a solid plan in place for repaying the loan you are taking.

Pros

Lower rate of interest.
Can sign off for a larger loan.
Easier approval process.

Cons

You will need to have collateral to offer.
Collateral will always be at risk in case you are unable to repay the loan.

Unsecured loans

Unsecured loans are also called signature loans. They are loans which are given without any collateral. These loans are primarily given on the basis of your credit rating, your income, and your debt to income ratio. In this case, you, the borrower will carry less risk, while the lender will bear the most of it.

Your creditworthiness is weighed quite heavily here, and it should be stellar in order to meet most of the criteria for obtaining these types of loans. It is recommended that you check your credit with one of the major credit bureaus since this will be advantageous in case there’re any issues which must be addressed before you apply for a loan. Another type of unsecured loan is the credit card.

Every time you are making purchases with your credit cards, you will be committing yourself to the idea that you have to pay the money back to the credit card company in a pre-determined period of time. One of the advantages of this type of unsecured loan is that you don’t have to fill out an application for each transaction.

Just imagine how quickly credit card transactions are processed. It barely takes a few moments for you to receive a loan which is nothing when compared to the amount of time you need to wait for a secured loan. The drawbacks for these types loans are that you will be paying a higher rate of interest since the lending institution is taking a higher risk by lending you the money.

Before obtaining an unsecured loan, you will need to agree to a number of terms. This includes the amount of interest you’re going to have to pay and the amount of time you have to repay the loan. There is very little space for negotiation here.

Since the lending institution is taking most of the risk, you should not expect to have too much leeway here. But you have the benefit of obtaining a loan even if you don’t have any collateral. For many people, this is a ray of light.