There are many types of loans in the financial world. Each of them has different strengths and drawbacks. If you are wondering which kind of loan would be best for your project, need or business, use this list to guide you to the right type of loan decision.
Many loans are called personal loans. This is why we wanted to speak about this one first. In the same way that all cars are a type of vehicle, but not all vehicles are cars, many loans are types of personal loans.
Personal loans are used when you borrow money for a non-business reason. There are many lenders and providers of personal loans, such as banks, credit unions, credit card issuers, or online financial lenders, as well as services like FatCat Loans that matches a customer application with a suitable lender. Personal loans are often used for weddings, vacations, debt consolidation, and medical treatments. They tend to last for 24 to 84 months, depending on your agreement. Additionally, they can come in two forms; secured and unsecured.
A secured personal loan means that an item has been agreed upon as collateral if you fail to pay. This way, the bank knows they are getting something even if the future changes for you. You could put up jewelry, land, or anything with the same value as the amount you want to borrow. Unsecured loans are harder to get. This is because the bank has no way to trust you can pay it back, as there is no collateral item.
Auto loans are a type of secure personal loan. They are for buying an auto on finance terms for payments instead of buying it outright.
If you cannot pay for the monthly payments, the lender can claim your car back as collateral.
Payday loans are short-term loans that you often pay back in one month's time. The idea is to get a quick loan to help you make payments before your next paycheck comes.
If your car breaks down and you don’t have the money that month to pay for a mechanic, a payday loan can help you borrow money quickly. You can then pay it back with your next paycheck.
However, you should be careful with these as payday loans interest rates can be super high. We advise sticking to trusted sources like Credit Ninja if you need to stretch your bank account.
Mortgage loans help you to buy a house. They are a type of secured loan. This means that if you cannot pay your monthly mortgage payments, the lender can take your home.
However, they are also designed to be long-term. Thus, allowing you to make reasonable payments for decades instead of years.
Student loans are a type of unsecured loan. You will not get something taken from you if you cannot pay your debt. However, this means that the interest rates are often higher.
That being said, the nation wants the people to have an education. They know that most people cannot afford student tuition without funding. Thus, you can apply for a federal loan or a Free Application For Federal Student Aid (FAFSA). These loans have special protections around them to keep the users safer. It also allows you time before asking for payments. In addition, those with student loans can also seek help in refinancing options. Companies like Purefy help students re-evaluate their interest rates and refinance with the lowest rate possible. Enabling students to pay off those loans faster, making education a more affordable option.
Home equity is the portion of your home that you have paid off and “own”. For example, if you have a mortgage loan, but you have paid off half of it, then you own around 50% of the home. The other 50% still technically belongs to the lender.
A home equity loan is when you take out a secured loan on the part of the property you own. For example, your home could be worth $200,000, your mortgage could be worth $100,000, and you own the other $100,000.
Knowing you have $100,000 locked up in your property, you could take out a home equity loan of $50,000. You can then pay this back like a mortgage. This means that one lender owns 50%, another 25%, and you own 25%. You would now have two loans to pay back. But you’d have $50,000 in your bank account.
Credit building loans are a common type of small loan with very short terms. They can help you build up your credit score rather than help you with money woes.
Credit builders tend to lend around $300 to $5,000. Their rates tend to be good. This is because you won’t be borrowing a lot of money. They also often target younger people in general.
Because credit builders are designed for people who are just getting started in the finance world, they often have a lot of guidance around loans in general. This means if you need more help than usual, these lenders will be more willing to walk you through the process.
Consolidation loans are loans that pull all of your debt into one place. This means you can make just one payment a month instead of sending money to multiple lenders.
Consolidation loans tend to have lower interest rates at the beginning. Then they start to rise after a short amount of time. Because of this, you want to move from one consolidation loan to the next when they announce the APR rate is changing.
Many people move their credit card debt into loan form. This is because often the interest rate will be lower. But the best method often means keeping an eye out for the lowest rates. Then, making sure your lender’s rate doesn’t change on you.
These are the most common types of loans you can apply for. Some can be used for business purposes. Use our descriptions to see if any seem helpful to you, as you now have the language to find the right type of loan for your situation.