What is the difference between a mortgage and construction loan?
Where a person or company borrows money from another with the intention of paying this amount back, the money is said to be on loan; when money is lent in this manner, the debtor must abide by the repayment terms set by the creditor. Lending money has been around since it was invented although people and other goods or services have been lent to others for longer but as the majority of these are for money; this is what this article is about. The period a loan will run generally depends on the financial circumstances of the borrower but normally the longer this period, the more it will cost; the usual repayment method is based around monthly installments but this period can be longer.
This service is generally provided at a cost, referred to as interest on the debt and it can vary how this is repaid. Although not seen as much these days one type of financial agreement ensures that the first payments made to clear the debt are in fact just the charges on the sum owed. However the normal way to repay a debt is to ensure that each monthly repayment combines part sum and part interest.
Whilst financial establishments can play many roles, this is the most frequent way in which they are used. For both companies and individuals, arranging a loan is a way to increase their cash flow for a regular monthly outlay. this is the simplest and most reliable means to raise finance.
A mortgage is a very common type of debt and the primary method used by individuals to purchase a house however with this type, the money advance can only be used for the purpose for which it was intended. Debts of this nature are of course much larger than the standard and the lending company requires some security from the borrower; the standard method is by retention of the title to the property until the debt is paid back in full. With this type of loan, should the borrower fail to make payments on the loan or default, then the bank or other financial institution has the right to sell the property; although selling the property is one option, keeping it as an investment is another. A construction loan is nothing more then a regular mortgage loan with a 12 month construction period added at the beginning of the mortgage period.
Even small loans can be secured but this generally only happens when a person has a poor credit history which could be the case of a person buying a car; in this instance, the car becomes it's own security for the debt. Whilst secured loans can last a considerable time, this is usually as long as it remains possible for the finance company to reclaim costs should they need to sell the item; usually lasting no more than 5 years, maximum
Financial companies organize unsecured loans everyday although many people do not even realize that is what they are being provided with; credit cards, bank overdrafts and other forms of finance all fall into this category. Typically, interest rates on credit cards or store cards will be the highest but all unsecured credit rates will of course vary from one lender to the next.
Financial companies can be caught out too when they provide cash to a person so they can gain advantage over his or her situation; also known as predatory lending. Credit card companies in many countries are often accused of a similar practice where they lend money at very high interest rates and make money out of frivolous extra charges. You would be wise to be wary of financial arrangements that seem to good to be true because they probably are.
Article Source: http://www.search-raven.com
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