Types of Loans (The Ultimate Guide)

Last updated on July 19th, 2024 at 05:19 am

You can use loans to help you accomplish important life goals like going to college or purchasing a home. You can even apply for an auto loan if you want to buy your dream vehicle! Feel free to read more about this before taking the loan.

There are loans available for a wide range of purposes, including ones that can be used to repay previous debt. However, it’s crucial to understand the kind of loan that would best fit your requirements. Keep in mind that as long as loans have advantages, they can be quite tricky and come with a few disadvantages, but that’s not our topic.

How Do Loans Work?

Before taking up a loan, you need to have some basic knowledge about them. First of all, you can apply for a loan from a bank or credit union. Then, the loans can be secured or unsecured. Secured loans use personal assets as collateral, while unsecured don’t require collateral and have higher interest rates.

Also, you can get an installment or term loan, which allows you to repay a fixed payment over some period. Another thing to be aware of is revolving credit. You take up a predetermined credit limit, and at the end of each payment period, you can either repay everything or transfer it for the next month.

8 Loan Types

In this article, we decided to explain the most common loan types people usually take.

1. Personal Loans

The first loan type is a personal loan. These loans can be used for everything you may need them for. Another important thing is that they are mainly unsecured, meaning you won’t need to put any collateral. Just be ready for some higher interest rates, as they are a bit riskier.

Personal loans can have variable or fixed interest rates, and they can be repaid in a few months to a few years. People can take these loans for weddings, home renovation, etc.

2. Auto Loans

The second most common loan type is the auto loan. As we know, cars are quite expensive, so quite often, people apply for auto loans. The thing with these loans is that they land you the prize you need for the car. The collateral is only the car, so your car will be taken if you don’t pay for the debt. 

Credit unions, banks, online lenders, and even automobile dealerships frequently offer auto loans. Some auto dealers have a financing section that may advise you in choosing the best loan from their list of loan partners. Auto loans are repaid from 36 to 72 months.

3. Student Loans

Student loans are mainly given by the government or from private lenders. As the name implies, these loans are used for students to cover their studying expenses and graduate college. But what is the difference between government loans and those from private lenders?

Federal student loans are more appealing since they provide alternatives for the delay, forbearance, cancellation, and income-based payments. Every borrower receiving the same kind of loan will be entitled to the same loan terms, which include fees, repayment schedules, and interest rates. Private lenders for student loans typically conduct credit checks and determine their own loan conditions, interest rates, and fees. Benefits like debt forgiveness or income-based repayments are omitted from these loans.

4. Mortgage Loans

Mortgage loans are taken by those who want to buy a new home. Same as with auto loans, the collateral is the property, and it can be taken if you don’t repay the debt. These loans are usually repaid over a period of 10, 15, 20, or 30 years. Mortgage loans can have fixed or variable interest rates, depending on where you get the loan from.

5. Home Equity Loans

Home equity loans allow you to get the prize to a percentage of the equity in your home. You will repay this loan in 5 to 30 years. This loan type is revolving credit. The borrower will pay the interest on the amount borrowed until the period ends. Home equity loans come with fixed interest rates.

6. Credit-builder Loans

The credit-builder loans are helpful for those with poor credit. What’s specific about these loans is that the lender deposits the loan amount into a savings account. You can repay the credit-builder loan in 6 to 24 months, and once you clear your debt, you will get the money back.

7. Debt Consolidation Loans

The debt consolidation loan will help you repay debts that have higher interest rates. Since there is only one lender to pay instead of multiple, consolidating debt also simplifies repayment. If the interest rate on these loans is lower than the interest rate on your current debt, you could save money. These loans come with fixed or variable interest rates.

8. Payday Loans

Payday loans are short-term loans, and these are not the best loan types you should apply for. They charge fees equal to annual percentage rates, and they must be fully repaid by the next payday. Payday loans are easy to borrow, and you can get between $50 and $1,000.

However, these loans may take you into a cycle in which you can’t repay them on time and just go more and more into debt. So, pay attention before you apply for a payday loan.

Conclusion

Purchasing a more expensive good or opening a business may be tricky if you don’t have enough money, but thanks to the loans, you may get the chance to achieve your dreams. However, be very careful when you apply for a loan. Read everything in-depth and pay attention to even the smallest details in the contract. As helpful as they are, they can also become a big problem.