Loans provide an effective way to achieve long-term goals, handle unexpected emergencies, and buy expensive items you could otherwise not afford. However, before applying for a loan, you should first determine which type of lender financing is ideal for your needs. Here are nine types of loans you should know about.
Personal loans
These are loans whose proceeds can be used for weddings, vacations, relocation to a new town, medical treatment, debt consolidation, home renovations, electronics, and emergencies. Personal loans have broad repayment terms, often 24 to 84 months. They also come in two forms: unsecured or secured.
Secured personal loan
A secured personal loan is backed by collateral. It could be a title deed, vehicle, or savings account that the lending company could take back if you default on payments. They apply where you want to borrow a considerable amount of money.
Unsecured personal loan
Unsecured personal loans, also known as signature loans, do not require collateral. They are only backed by the borrower’s signature. They are often more expensive than the secured personal loan as the lender takes up all the risk. You also need to have a good credit record to get an unsecured personal loan.
Title loans
You qualify for car, RV, or truck title loans if you own a vehicle. A title loan allows you to borrow a specific amount of money, usually 25% to 50% of the vehicle’s value, and use the truck as collateral. According to the Federal Trade Commission, a title loan ranges between $100 and $5,500. However, a car title loan can be an expensive financing option as you are required to pay a monthly charge of 25% of the principal amount, which converts to a 300% annual percentage rate. You should also pay the loan within 15 to 30 days, failure to which your vehicle is repossessed.
Payday loans
A payday loan is a short-term loan due by the next paycheck. They are a quick solution to your monetary problems as you do not need to have a good credit record as payday loans are not credit-based. They also allow you to roll over the loan if you cannot clear the debt before the next payday. However, they have incredibly high finance fees, often a 400% annual percentage rate (APR). Rolling your loan also means additional costs, so you may pay more than you initially borrowed.
Mortgage loans
A mortgage loan helps you fund the purchase of a property. The purchased home becomes collateral, and your lender can foreclose the house if you fail to pay mortgage payments. Mortgages are repaid within 10 to 30 years. There are various types of mortgage loans, including:
- Fixed-rate mortgages: They allow the borrower to pay the same interest rate throughout the life of the loan.
- Adjustable-rate mortgages: These loans have a fixed interest rate within the initial term. The interest rate changes based on the prevailing market conditions after the initial period.
- Government-insured loans: These are mortgages backed by government agencies like the Veterans Administration (VA) for veterans and active-service employees, Federal Housing Administration (FHA) for low or moderate-income earners, and USDA for low-income persons in rural areas.
- Conventional loans: These are mortgage loans such as the Rural Housing Service (RHS), not funded by government agencies.
Student loans
These are loans offered to outstanding students and their families to cater for living expenses, fees, and tuition in accredited schools. There are two types of student loans: private and federal. Federal student loans are offered by the government, while credit unions and banks provide private student loans.
You might be wondering: federal student loan vs. private student loan: which is better? Federally sponsored loans have lower interest rates and offer forbearance, deferment, forgiveness, and income-based repayment terms.
Home equity loans
A home equity loan, also known as a second mortgage or a Home Equity Line of Credit (HELOC), is a secured loan in which your property is used as collateral. It allows you to borrow a certain amount of cash against the equity you have in your home, the portion of your property not owned by the bank, or the difference between how much you currently owe on the property and the house’s market value. Home equity loans allow you to borrow up to 85% of the equity you have on your home, in which you are paid as a lump sum and allowed to repay within five to 30 years. To determine your home’s equity, you should evaluate your mortgage balance and then subtract it from the assessed value of your property. You can use a home equity loan proceeds for home renovations, credit card debt consolidation, and medical bills, among other projects.
Auto loans
Credit unions, online lenders, banks, and car dealerships offer auto loans to help you purchase a vehicle. You borrow the purchasing amount less the down payment. The vehicle becomes collateral and can be repossessed if you default. An auto loan term ranges between 12 to 84 months and attracts a 1.04% to 13.97% annual percentage rate.
Pawn shop loans
If you need to borrow cash fast, you could consider getting a pawn shop loan. This loan type requires you to bring an item of value to your pawnbroker, including a musical instrument, pieces of jewelry, or an electronic or power tool. The broker assesses the items to determine their value and then offers a loan, often 25% to 60% of the resale value. Pawn loans attract high-interest rates and short repayment terms. The pawnbroker gives back your property when you repay the loan on time. However, if you default payments, the lender can sell the item to recover their money.
Family loans
A family loan is an informal financing option in which you borrow money from a family member or friend. It is suitable when you cannot qualify for loans from lenders or banks. It attracts little or no interest rates and administrative fees. You also do not need credit to secure a family loan. Be sure to draft an agreement and repay the loan promptly to avoid straining your relationship with your friend or family member.
Endnote
Before you borrow money, familiarize yourself with the above loan types to determine the best suitable. Next, set a budget to ensure that you borrow what you can afford to repay within the specified period.
