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Types of Borrowing

Broadly speaking, there are two major types of debt that you are likely to see, revolving debt and term loans.  Revolving debt is like a credit card.  As long as you pay down your balance, you can keep borrowing up to your limit. Money is borrowed out and then paid back in and so on and so forth.  In other words, it revolves.  Since lenders give you a lot of flexibility with this type of lending, revolving debt usually has very high interest.

Term loans, on the other hand, are different in that you borrow a sum of money then pay that money back by a set date.  Since it’s not revolving, you can’t just pay down your balance and borrow up to the limit again.  Some good examples of these types of loans are Stafford Loans, personal loans, auto loans and mortgage loans.  Term loans have much lower interest rates than credit cards and can be for a much larger amount, but will generally take longer to process.

Essentially, different types of debt are suited for different purposes.  Credit cards are great for small short-term purchases that you can pay down relatively quickly, or if you need the cash right away.  You definitely don’t want to make a large purchase you can’t afford to pay back quickly on a credit card though, since the interest will be very high.  On the other hand, a term loan that takes a month to process might not be the best idea if you need to make a payment tomorrow.  All loans have their purposes and understanding what your options are can really help.


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