It's a good idea to save money for any large purchases or expenses such as getting a car or home, going to college, or starting a small business. However, it's not always possible to meet those expenses, in which case you can take out loans to fulfill your needs. The suitability of loans depends on the borrower’s needs, situation, and preferences, so you must familiarize yourself with the types of loans before deciding to get one. Here are three common types of loans, with their subtypes.
Consumer loans fund specific types of personal expenditures, like education, home purchase, or for general living expenses. These can either be secured by collateral or be unsecured.
Generally, you can obtain better financing with lower interest rates and more extended repayment periods with secured loans. Unsecured loans, on the other hand, are in the form of smaller sums with greater interest rates and a shorter repayment period. They also often heavily depend on credit histories as well.
Here are four common types of consumer loan options:
A mortgage is a secured loan given to a consumer by a bank to buy a house in case the house costs significantly more than an average person's annual income. Before giving the loan, banks set criteria and analyze the consumer's credit score and ability to pay the downpayment. This type of loan is stretched out over a more extended period. Typically it's a 30-year fixed-rate loan to make the monthly installments easier to pay. Over the years, this lending industry has undergone significant changes, and applying for a loan is now easier and faster than ever before. With the rise of online lenders, you can now apply for quick personal loans online in Australia from the comfort of your own home.
Auto loans are granted either by a bank or car dealers themselves to finance a vehicle purchase. An auto loan is typically secured against the vehicle under consideration – the lender can possess the vehicle if you don’t pay the loan as per the agreed terms. Auto loan repayment duration typically ranges from 2 to 7 years. Auto loans generally have shorter tenures with larger down payments due to the rapid depreciation of car values.
Car title loans allow the consumer to borrow 25 to 50% of the value of their vehicle. In exchange, the lender is given the title to that vehicle as collateral. The lender can take the vehicle if the loan is not paid back on time.
These loans typically have a simple application process with little or no credit requirements, and you can obtain the loan as soon as 24 hours. These loans generally have great interest rates due to their ease of access. You can also obtain these loans for motorcycles or recreational vehicles like boats.
These loans also include salvage car title loans, where you can obtain a loan offering your salvage title car as collateral. A salvage title car is one which has been damaged so much due to an accident that the cost of repairs is greater than its value.
Student loans are unsecured consumer loans that enable borrowers to pay their college tuition fees and pursue their education. The loan payment typically starts only a few months after the student has graduated.
Students can avail of these loans from the federal government, funded by the U.S. Department of Education, or private lenders. Federal student loans are often more desirable as they typically don't require a credit check, are more forgiving, offer the option of deferment, and offer income-based repayment options.
Student loans from private lenders usually require a credit check. The lenders also set their own terms regarding interest rates and repayment terms, unlike federal student loans, which offer the same terms to all individuals.
Banks, credit unions, banks, and some other financial institutions offer small business loans. Businesses can use the funding for various operational and expansion purposes, like purchasing inventory or equipment, hiring new staff, financing long-term or short-term projects, investments, etc.
Typically, these loans are secured and include a credit check. There are several types of small business loans, and the terms of each one can vary. Here are three common types of business loans.
A business line of credit is a loan that works like a credit card. A credit limit is given to the business owners within which money can be borrowed, repaid, and then borrowed again. Interest is only charged on the borrowed amount, not the whole credit limit. Many business lines of credit are unsecured, so they don't require collateral.
In business term loans, a one-time lump sum of up to 2 million dollars can be obtained. This sum is repaid at a fixed interest rate over the next 1-5 years with fixed, equal payments. Depending on the lender, business owners can pay the loan back weekly, bi-weekly, or monthly.
Small businesses can also obtain loans guaranteed by the U.S Small Business Administration. These are relatively low-cost, government-backed loans. A guarantee means that if the loan is not repaid to the lender on time, the SBA will repay the rest. 85% of the loan is guaranteed if the loan is up to $150,000, whereas only 75% is guaranteed for larger loans.
The application process for SBA loans is arduous and has a longer approval time. The process is also handled by an SBA lender, not a government lender. The application might take up to 3 months to get approved, so this option is best for those businesses which do not require immediate funding.
Crowdfunding is a relatively new form of getting loans. Consumers and business owners can make their case on the internet in hopes of getting many microloans from people online, moved by their story. The money doesn't even have to be repaid in some cases.
The crowdsourcing site takes a cut of the money raised, paying the rest to the recipient of the loan. Some well-renowned crowdfunding sites include GoFundMe and Kickstarter.
No matter which common type of loan you choose, each comes with its risks and benefits. You must carefully analyze your needs, weigh the advantages and disadvantages of each type of loan, and then decide to get one. Make sure to devise a repayment plan on time so you can protect your assets and make the most out of the funding a loan grants you.