Different Types of Loans

Making purchases strictly with cash on-hand is often unfeasible for most people. As such, people often take out money on credit with the intention of being it back with interest. This financial structure is known as a loan and is a familiar concept for most adults.


Even though most Americans are familiar with the concept of a loan, deciding what specific loan to take advantage of can be daunting given the number of choices and complex terminology attached to loans. In this article we’ll briefly describe different types of loans and some considerations to keep in mind when choosing what loan works best for your financial goals.

Personal Loans

Personal loans are general loans used for a variety of personal financial obligations. Terms for Personal loans typically range from 24 to 84 months. Below are some examples for why a borrower might take out a personal loan:

  • Vacations
  • Weddings
  • Emergencies
  • Medical attention
  • Home improvements
  • Consolidation of debts
  • Moving to a new city
  • Computers and other high-priced electronics

Personal loans are often classified as either secured or unsecured. Secured loans are secured by collateral, such as a savings account or a vehicle. The lender can repossess the security if the borrower fails to pay the loan on time. Unsecured loans, on the other hand, do not require collateral and are secured just by your signature, hence the alternative name: signature loans. Because the lender assumes greater risk, unsecured loans are more costly and require stronger credit.

Applying for a personal loan is typically a simple process. A loan can typically be applied for online through a bank, credit union, or internet lender. Borrowers with good credit may get the best personal loans, which have low interest rates and a variety of repayment alternatives.

Auto Loans

Auto loans are a secured type of loan. Buying a car can be a pricey endeavor. An auto loan allows a borrower to finance the purchase price of a car less any down payment. If the borrower fails to make payments, the car is used as collateral and can be repossessed. Auto loan lengths typically vary from 36 to 72 months, while lengthier loan periods are becoming more frequent as vehicle costs climb.

Student Loans

Student loans help aspiring graduates with the cost of college and graduate education. They can be obtained from both the federal government or through a private commercial lenders. Applying for a student loan requires filling out the Free Application for Federal Student Assistance (FAFSA) and working with the school's financial aid department to apply for federal student loans. Federal student loans offer some flexibility and more of a guarantee since they’re used for education, but the trade-off is that they typically are provided at higher interest rates. Private student loans, on the other hand, have fewer safeguards, but if your credit is acceptable, you may be able to qualify at lower interest rates.

Mortgage Loans

Mortgage loans are used to pay for a homeowner’s purchase, minus any down payment. Mortgage payments are secured loans. If mortgage payments are not made on time, the lender may foreclose on the property. Mortgages are often repaid over ten, fifteen, twenty, or thirty years. Government agencies do not cover conventional mortgages. Certain borrowers may be eligible for government-backed mortgages such as those offered by the Federal Housing Administration (FHA) or the Veterans Administration (VA) (VA). Mortgages can have fixed interest rates that remain constant during the loan's term or adjustable interest rates that can be altered annually by the lender.

Home-Equity Loan

Home-Equity Loan are sometimes referred to as a second mortgage. The loan is secured by the equity you have in your house— the actual mortgage loan that you have taken out with the bank. Borrowers may normally borrow up to 85% of the equity in your house, which is paid out as a single sum and repaid over a five to thirty-year period.

Credit-Builder Loan

Credit-builder loans are intended to help people with bad credit or no credit rebuild their credit. Because these loans are intended to help borrowers increase their credit score, they are typically secured against actual cash on-hand. The lender deposits the loan amount (usually between $300 and $1,000) into a savings account. You can then make fixed monthly payments for six to twenty-four months. When the loan is returned, you receive the funds (with interest, in some cases). Before you apply for a credit-builder loan, you should ensure that the lender reports it to the three main credit agencies (Experian, TransUnion, and Equifax) so that on-time payments can help you enhance your credit. Debt Consolidation Loan

Debt consolidation loans are used to repay high-interest debt, such as credit cards. If the interest rate on these loans is lower than the interest rate on your existing debt, the borrower saves money. Debt consolidation loans streamline payments by requiring only one payment to one lender rather than numerous lenders. Paying off credit card debt with a loan might improve your credit score by lowering your credit use ratio. Fixed or variable interest rates and a variety of payback options are available with debt consolidation loans.

Payday Loans

Payday loans are a loan best to avoid. These short-term loans generally incur costs comparable to 400% or more annual percentage rates (APRs) and must be returned in full by your next payday. These loans, which are available through online or brick-and-mortar payday lenders, typically vary in size from $50 to $1,000 and do not need a credit check. Although payday loans are simple to obtain, they are sometimes difficult to return on time, so borrowers renew them, resulting in increased penalties and penalties and a feedback loop of debt. If you need money for an emergency, personal loans or credit cards are preferable possibilities. Avoiding these “loan sharks” is best, especially since there are alternative options and new financing models available to take advantage of.

Choosing the specific loan type that matches your purchase is most likely your best option. However, there are a variety of financers and financial considerations to decide on which loan is best for you. Some factors can include monthly income, potential savings, credit history, expected upcoming expenses, etc. Be sure to read up to become knowledgeable and run your own numbers to decide what loan structure and financer is best for you.

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