We mentioned several types of loans that fall into the categories above. Let’s take a closer look at these common loans you may get throughout your life to better understand how they work and why you may consider using them. You get a home or mortgage loan to purchase a house or real estate property. The amount you borrow on a mortgage is based on the appraised value of the home and the amount of money you pay as a down payment. These types of loans are secured and closed-ended loans and can be conventional or nonconventional. The house will be put up as collateral and you will make monthly mortgage payments for a specified amount of time (typically 15 or 30 years) until the loan is paid off. Auto loans are taken out to purchase a new vehicle, while typically putting that vehicle up as collateral for the lender. That makes them secured loans, typically, as well as closed-ended. Like a mortgage, the amount you borrow will depend on the value of the collateral – the car you are purchasing with the loan – minus the down payment, if you are required to make one. You’ll make monthly payments to the loan for a specified amount of time until it’s paid off.1. Home And Mortgage Loans
2. Auto Loans
3. Student Loans
You take out student loans to cover costs of higher education, which may include tuition, room and board, other living expenses and classroom expenses including textbooks and lab fees. These loans are typically unsecured and closed-ended. You will not need to put up collateral for this type of loan.
Student loans can also break down into one of two other categories: subsidized or unsubsidized. Subsidized loans are based on your financial need. You must demonstrate a financial need to qualify and the amount you borrow will not exceed the amount you need. Unsubsidized loans are for any student, regardless of financial need. The amount you borrow is based on the cost to attend the school and what other financial aid you’re receiving.
4. Business Loans
Business loans are used to set up a new business or expand upon an established one. These types of loans can be open-ended or closed-ended and are usually secured loans, as it is commonly required to offer up an asset as collateral. Such assets you can use as collateral include equipment, buildings, inventory or accounts receivable.
While some businesses choose a one-time loan, others choose a line of credit from which they can borrow continuously as long as there is credit available.
5. Payday Loans
Payday loans are short-term loans that are due upon receipt of your next paycheck. They’re often used when someone is in a bind and needs cash fast since there are very few requirements and no credit checks to qualify.
However, these types of loans are notorious for high lending fees and annual percentage rates (APR) and can be difficult to pay off for lower-income individuals. This is why they’re often referred to as predatory loans.
The government and many finance experts discourage the use of payday loans, and some states ban the practice entirely. Avoid payday loans if you can and consider any alternatives if possible.
6. Personal Loans
A personal loan is a type of installment loan that offers much more flexibility for borrowers. Compared to student loans or mortgages, personal loans allow borrowers to use their financing however they see fit. You could use a personal loan to consolidate high-interest credit card debt or fund your next home project.
Some personal loan providers offer a fast funding turnaround once you’ve been approved, and with average terms ranging from 2 to 5 years, you’ll likely have a good amount of time to handle repayment. Expect personal loan interest rates to be higher than student loans and mortgages, but lower than credit cards.
7. Borrowing From Family And Friends
Often considered an “informal” personal loan, borrowing from your personal network is one quick method for securing funds fast and with little to no administrative fees. Though it can be a way to borrow relatively inexpensively, both the borrower and lender should consider the implications of mixing finances and personal relationships.
On one hand, a personal, individual lender will likely have much lower standards than a traditional lender, which could make this kind of arrangement a good option for those who do not qualify for more conventional loan types. Your friend or family member will also have full control over the interest rate they charge you, which could mean much lower rates.
On the other hand, these types of loans rarely have the same legal standings as more official loan arrangements. Without the right legal documentation in place, you could have little to no control over abrupt increases in the interest rate, term or other repayment conditions. Receiving funding from a close connection can also complicate or damage the personal relationship you have with that person.
Consider your options or speak with a legal professional before you seal the deal.
8. Cash Advances
A credit card cash advance is a short-term loan for borrowers who need fast access to funds. Cash advances work by using your credit card to “purchase” cash, similar to making other purchases on plastic. However, unlike a regular purchase, you’ll likely have a much lower limit on the amount you can take out with a cash advance.
Because there is no application process, cash advance loans provide a fast, simple way for borrowers to resolve their immediate financial needs. However, the convenience of a cash advance comes at the expense of higher interest rates, no grace period and additional processing fees with certain banks.
