Everything You Need to Know About the 4 Most Common Types of Loans
At some point in your life, you may have to apply for a loan, so knowing the many types of available loans is essential. It could be for a planned purchase of something significant like a house or a car or an unplanned expense when you find yourself in an emergency and need cash. People might also take loans for other small life events that crop up, like a wedding or going on vacation.
Whatever the reason, if you need money, it’s essential to know about the different loan options and choose the right one for your needs.
4 Most Common Types of Loans
Go to any bank, credit union, or lender’s website, and you will find several types of loans that offer different rates and credit terms. It can be not very clear to understand them and know which one is right for you, but there are four basic types:
- Personal loan
- Mortgage
- Student loan
- Auto loan
The Personal Loan
Personal loans are incredibly versatile and can be used for almost anything. People take out personal loans for emergencies, renovate their homes, pay for a vacation or wedding, or consolidate their debt.
Personal loans are usually short-term, with the repayment time being a few months or a few years. Depending on the type of personal loan, it can be secured, meaning the lender will require unsecured collateral where you will not have to provide collateral. Unsecured loans tend to carry a higher interest rate.
Securing a personal loan is relatively simple and can be done online. Once approved, you can expect to receive the cash within one to five days. If you have an emergency and need money quickly, consider applying for a Payday or personal loan online; e.g., Creditninja.com gives cash loans fast.
A Payday loan is an unsecured loan for a small amount of cash. While getting one is easy, it comes with a high-interest rate. A Title loan is equally easy to obtain but is a secured loan. The borrower must put up collateral for the loan, usually in the form of a car.
You may qualify for personal loans with a lower interest rate if you have a good credit score.
The Mortgage Loan
A mortgage or a home loan is used to help people purchase a house since a house costs much more than the average person earns in a year. Mortgages are long-term, fixed loans paid back in monthly installments at a fixed rate for either ten, twenty, or thirty years. The most common term is thirty years.
Three types of mortgages are conventional, FHA, and VA.
Fannie Mae and Freddie Mac insure conventional mortgages and are best suited to people who can make a down payment of 20% or more.
FHA loans are suitable for lower-income people who can make a lower down payment of less than 20%. The Federal Housing Administration backs this load, offering essential information about FHA loans.
VA loans are available to active-duty service people and veterans who want to purchase a home and are insured by the Veteran Administration.
The Student Loan
Student loans are specifically for graduate or college students to cover their tuition, fees, and living expenses during the course. There are two types of student loans: Federal Student Loans and Private Student Loans.
Federal student loans can be further broken down into subsidized and unsubsidized loans. The government subsidizes these loans and pays off the interest on these loans while the student is at school. This type of loan is for people who need financial aid the most. Anyone who wants to study but can’t afford it may apply for an unsubsidized loan.
Federal student loans can offer more benefits like deferment of payment and, in some cases, loan forgiveness. However, the loan term and interest rate are fixed for all borrowers.
Some companies also offer private student loans. You can sometimes get a lower interest rate based on your credit score, but there are no other benefits like deferment of payment or forgiveness. The terms of private student loans can vary depending on the lender.
The Auto Loan
You can apply for an Auto loan if you’d like to purchase a car but don’t have enough cash. It can be used to buy a new or used car. The collateral is the vehicle itself, which can be repossessed if you default on payment.
Typically, the repayment terms are between three to seven years, and you can choose to make a down payment to decrease the loan amount and the interest you pay on the loan. Since the value of a vehicle decreases rapidly, it’s best to put down a larger down payment and shorten the term if you can afford it.
References
- Forbes: 16 Types of Loans to Help You Make Necessary Purchases
- Valuepenguin: Types of Loans: What are the Differences?
- Experian: 8 Different Types of Loans You Should Know
- Credit Karma: 8 Different Types of Loans You Should Know
- Investopedia: Understanding Different Loan Types
