At some point in your life, you may have to apply for a loan–so it is important to know the many different types of loans available. 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 is, if you find yourself in need of 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 pretty confusing understanding them and knowing which one is right for you, but these are four basic types:
- Personal loan
- 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 collateral, or unsecured, 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 cash quickly, consider applying for a Payday loan or a 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 it’s easy to get one, it comes with a high-interest rate. A Title loan is equally easy to obtain but is a secured loan. The borrower is required to put up collateral for the loan, usually in the form of their 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 the cost of a house is much more than the average person earns in a year. Mortgages are long-term, fixed loans that are paid back in monthly installments at a fixed rate for either ten, twenty, or thirty years. The most common term is thirty years.
There are three types of mortgages named – conventional mortgages, FHA loans, and VA loans.
Conventional mortgages are insured by Fannie Mae and Freddie Mac 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.
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 are in the most need of financial aid. 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
If you’d like to purchase a car but don’t have enough cash saved up, you can apply for an Auto loan. It can be used to buy a new or used car. The collateral is the vehicle itself, so the car 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.
- 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
- Creditkarma: 8 Different Types of Loans You Should Know
- Investopedia: Understanding Different Loan Types