A Comprehensive Guide To Different Types Of Loans

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You can use loans to accomplish important life goals that you otherwise couldn’t afford. Consumers frequently obtain loans for housing, education, debt consolidation, and daily living costs. Loans are readily available for operating capital, inventory, real estate, growth, and other objectives for the expanding small business. The loan market offers a wide range of possibilities. However, if you are ready to apply for a loan, it’s critical to understand the kind of loan that best meets your needs. Here are the most typical loan types and some of their main characteristics.

  • Common Loan Terminology
  • Consumer Loans
  • Auto Loans
  • Small Business Loans 
  • Final Thoughts

Common Loan Terminology

You can examine different loan types based on their functions or purposes. Refer to the following list to know more about fundamental loan terms that all borrowers should know.

  • Secured loan uses an asset you own as security; if you don’t pay back the loan, the lender may seize the asset.
  • Unsecured loans do not need any. Since they are riskier for lenders, they typically have higher interest rates than secured loans.
  • Term or installment loan is repaid over a predetermined time with fixed payments.
  • Revolving credit allows you to borrow money up to a predetermined credit limit. 
  • Fixed-rate loans have an interest rate that stays the same throughout the loan.
  • Variable rate loans have fluctuating interest rates on the prime rate. Your loan’s interest rate may increase if the prime rate does.

Consumer Loans

Installment loans are the most common type of consumer loan. These loans are given out in one big sum by the lender and are repaid over time with regular monthly installments. 

Personal loans

The most versatile loan product available to consumers is the personal loan. Personal loans can be taken out for various reasons, including debt reduction, regular living expenditures, vacations, and credit building. Personal loans can be secured or unsecured, depending on the lender. Interest rates on loans without collateral are higher because they pose a greater risk to lenders.

Auto loans

When you purchase a car, an auto loan enables you to borrow the purchase price balance, and sometimes without any down payment. The vehicle is used as collateral, so if the borrower stops paying payments, it may be repossessed. The best options for vehicle loans are shorter loan periods and higher down payments due to the quick depreciation of automotive value.

Student loans

Most people who need student loans choose to obtain federal loans, which have fixed interest rates. Some students decide to take out loans with private organizations due to the restrictions on federal loans. Interest rates on private loans are frequently cheaper than federal ones. Private lenders also offer student loans with variable interest rates. 

Mortgages

A mortgage loan covers the total cost of a home without any down payment. If mortgage payments are not made, the lender may foreclose on the property, which serves as security. Mortgage interest rates can either be fixed, which remains constant for the loan, or adjustable, which the lender can alter annually.

Small Business Loans

The Small Business Administration and most banks offer small business loans. People starting new firms or growing existing businesses frequently seek these out. These loans are only given out after the business owner submits a documented business plan for evaluation, among other documentation. The loan agreement typically includes a personal guarantee, which means that the business owner’s personal assets are used as security in the event of loan repayment default. 

Final Thoughts

Any loan you apply for will likely have more favorable interest rates if you have strong credit, regardless of the type. Your credit score may influence the interest rates you are offered and the debt-to-income ratio; strong to exceptional credit is typically required to obtain low-interest rates. Check your credit record and credit score to see where you stand before looking for loans.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. 

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