What are the Common Types of Loans?

To practice good financial habits, you should be aware of several types of loans available to you. Major types of loans, including personal, home, student, and auto loans, may be necessary throughout your life, especially if you don’t have enough saved up to pay for large purchases in cash.

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Most people need to take out loans at least once, so it’s important to understand the types of loans you can use and when. Here are some of the most common types of loans:

Personal Loans

Personal loans can be used for anything, including emergency expenses, weddings, home renovations, or even paying rent if you need it. Personal loans are typically unsecured, so they don’t require collateral, but they may have fixed or variable interest rates and varying repayment terms. Some lenders may restrict the types of things their loans can be used for, so you can’t use personal loans to pay for college or a mortgage (in most cases). You can also look into hard money loans which are issued by private lenders.

Auto Loans

If you ever need to buy a car, you’ll likely need an auto loan. You can get an auto loan from several types of lenders, including banks, credit unions, and even car dealerships. These loans allow you to pay your vehicle off over a set period instead of paying for it in full at the time of purchase, which can be beneficial if you don’t want to spend tens of thousands of dollars right away.

Unlike personal loans, auto loans are secured, and the car itself will serve as collateral. Therefore, if you don’t make the payments, your lender can repossess the car and sell it to get its money back. Auto loan rates vary depending on the vehicle and credit history of the borrower. However, payoff time typically ranges from 24 to 72 months, with interest rates from 3-7%.

Student Loans

If you go to university or college, you’ll likely need student loans to help pay for credit hours, dorms, and books. Student loans pay for your education and related costs, including tuition, housing, and even transportation. While lenders do not monitor how the money is spent, these loans should not be used for things other than schooling.

Student loans are available through federal and private lenders, but federal loans are more desirable because of their more flexible repayment options. The payoff timeline for student loans is typically ten years, but it depends on the type of loan and repayment terms. There are also several options for loan forgiveness available, so always do your research before committing to a private lender.

Mortgage Loans

Most people can’t afford to buy a house with cash, and as home prices continue to soar, fewer and fewer people are putting down large down payments. Mortgage loans allow you to purchase a home without the need to spend hundreds of thousands of dollars immediately.

With a home loan, you can live in the home before it’s fully paid off, but the loan provider technically owns the home until the mortgage is paid off in full. Mortgages are secured, and the house you purchase will serve as collateral. There are several types of mortgage options available depending on your needs, but term lengths typically range from 10 to 30 years, with APRs as high as 6%.

Home Equity Loans

HELOC loans allow homeowners to borrow against the equity they’ve built up in their homes. These loans are in installments, so you’ll receive a lump sum and pay it back over time in monthly payments. HELOCs are revolving lines of credit, so you can draw from the line of credit as needed and pay the interest on the borrowed amount until the set period ends.

How much a borrower can take out depends solely on the equity in the home. The equity is calculated by the house’s worth subtracted from the remaining mortgage balance. For example, if a house is worth $500,000 and there’s $250,000 left on the mortgage, a borrower can borrow up to $250,000.

Your house secures this type of loan, so if you fail to pay off the loan, you could lose your house.

Debt Consolidation Loans

Debt consolidation loans allow you to take out a new loan to pay off all your debts, including credit card debt, for a lower interest rate and monthly payment. These loans can save you money as long as the interest rate on the new loan is lower than the combined interest rates of your other loans. In addition, they’re often easier to manage than multiple loans because you only have to worry about one monthly payment instead of several, potentially helping you pay off your debt faster.

Payday Loans

Payday loans are short-term loans that charge fees that must be repaid in full by your next payday. These loans are typically ideal for individuals with bills they need to pay before their next payday. Unfortunately, because the fees are up to 400% or higher, they can also put you further into debt. Payday loans are available from payday lenders and don’t typically require a credit check. Unfortunately, they’re difficult to repay in time, so borrowers can choose to renew them, increasing their fees. Ultimately, payday loans should be avoided unless you don’t have any other option.

Pawn Shop Loans

Many pawn shops allow individuals to bring in items and get a loan. The pawn shop will take temporary possession of an item but cannot sell it for a set period, giving the borrower enough time to come and buy it back, plus interest. These loans can be beneficial if you need cash fast, but if you don’t buy back your belongings within the set period of time, pawn shops can sell them. These loans are extremely predatory, with pawn shops often giving borrowers only a small percentage of the item’s value.

Final Thoughts

There are pros and cons to every type of loan available, but sometimes you have no option but to borrow money. Always do your research about a lender and the loan type before committing to something that could harm your financial situation. While loans can improve your finances, they can also be predatory and cost you.

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