Nowadays, there is a massive amount of different types of loans offered for almost every purpose. But let’s channel the most common ones today. Consumers take on loans for education, home purchases, debt consolidation, and general living expenses. For small businesses that are still growing, loans are available for expansion, working capital, real estate, equipment, inventory purposes, etc. There are varieties of loan options available on the market; you need to know how they operate, so you can choose the one that best fits your financial needs. It is also essential you understand the different types of loans as they vary in their repayment schedules and interest rates.
What Is A Consumer Loan?
A loan given to consumers to finance expensive purchases is a consumer loan. A consumer loan can also be any loan or line of credit made to a consumer by a creditor. Consumer loans can either be secured or unsecured.
Secured loans need collateral. The assets of the borrower back them. On the other hand, unsecured loans don’t have to link to anything. The assets of the borrower do not back them. The following section shows the different types of consumer loans.
Types Of Consumer Loans
The different types of consumers loans are:
1. Personal Loans
Most lending institutions offer personal loans. You can use these loans for almost any purpose. You can use them for day-to-day living expenses, debt consolidation, vacations or credit building, etc. Typically, personal loans are unsecured. With personal loans, you can borrow relatively small amounts (ranging from a few hundred to a few thousand dollars). If you want a personal loan, you can apply either with your bank or your credit union. Usually, you will need to show proof of your income when applying for a personal loan. Approval or denial of a personal loan can be within a few days, few hours, or even a few minutes. Some other things you need to note about personal loans include
- Most people use personal loans to spread the cost of large purchases
- Personal loans are unsecured. You won’t be needing an asset (like your house or car) as collateral.
- It involves less risk since you don’t have to use collateral.
- Interest rates on personal loans can sometimes be high. To get a reasonable interest rate, you’ll need to have a high credit score.
- Personal loans are probably best for you if the amount you want to borrow is small and if you can pay it back within a few years.
2. Auto Loans
Auto loans are loans to finance the purchase of a car. Whether you are buying it outrightly, renting it, or paying for it in installments. Auto loan terms usually are between 24-60 months, and they have a fixed interest rate. The interest rate on an auto loan is much lower when purchasing a new car that the dealer finances. Interest rates on used cars are higher and based on the consumer’s credit score. Other things to note about auto loans include:
- Defaulting on a car loan has severe consequences. You will forfeit the car and still repay the loan.
- A credit union, online lender, bank, or car dealership may distribute Auto loans.
- Loans from the car dealership often carry the highest interest rates and ultimately cost more.
3. Mortgages
A mortgage is a loan taken by consumers when they want to buy a house. Mortgages can come from a building society, bank, or mortgage broker. Because most homes cost way more than the average American makes in a year, mortgages are to spread the house’s payment over many years and, consequently, make homebuying more accessible. Some important things to note about mortgages include:
- Mortgage programs are different. They depend on the agency sponsoring them.
- There are primarily three types of mortgages: FHA loans, conventional mortgages, and VA loans.
- When you apply for a mortgage, the lender considers your income, credit score, expenditure, as well as the value of the property.
- Mortgages usually have a lengthy loan term (between 15-30 years) because of the amount borrowed. The most common loan term is the 30-year fixed-rate mortgage.
4. Credit Cards
A credit card allows you to borrow money and pay it back every month. So, when you use your credit card, you are taking a loan. Usually, you will be charged interest for borrowing, but some lenders and credit card companies promote zero interest periods. Some things to note about credit cards are:
- Your credit score and rating determines the type of credit for what you can apply
- The credit card offers benefits such as protection for purchases made with the card, consolidation of other debts into a single payment, etc.
- Interest rates for credit cards are high, but you are charged only with the amount you borrowed.
5. Student Loans
Student loans are loans used by consumers to finance education. They sometimes relate to the federal government (federal student loans); this makes them easily accessible. Student loan payments typically start after graduation. Other things you need to note about student loans include:
- Student loan payments can be stretched out over the long term, making the monthly payments relatively small.
- You can take student loans from private companies or the federal government.
- Federal student loans are of two types: subsidized and unsubsidized loans.
- Subsidized federal student loans are for students with high financial needs, while unsubsidized federal student loans are for the average student borrowers.
6. Home Equity Loan
A home equity loan is the type of loan where your home’s equity is the collateral or security for a loan. Home equity loans are often a second mortgage. Equity is the difference between your home’s current market value and the amount you owe on the house. Other things to note about home equity loans include:
- Equity loans includes a set repayment period and a fixed interest rate typically
- It generally requires a good to excellent credit history
- Equity loans are typically used for home improvements, although you can use them for many other reasons.
Besides the already mentioned loans, there are other types of loans. They include:
7. Payday Loans
These loans are short-term cash loans that connect to your check. Payday loans typically carry a very high interest rate. You must note the following about payday loans:
- The total amount of the loan owed will be deducted from the borrower’s bank account on the repayment day, no matter what. This process is dangerous in a situation where you need the money for something else.
- Payday loans have high interest rates, which can sometimes lead to more debt if you don’t pay the balance, and this may do heavy damage to your credit rating.
8. Small Business Loans
Small Business loans are loans given to aspiring entrepreneurs to aid them in starting or expanding a business. These loans are available through the U.S. Small Business Administration (SBA) or most banks. Other things to note about small business loans include:
- The small business loan amount ranges from a few thousand to over a million dollars.
- Small business loans are for both general business expenses and specific business debts products like the commercial real estate loan
- To be eligible for a small business loan, most online lenders require that you must have been in business for a period of one or two years.
What Does It Mean To Refinance A Loan?
To refinance a loan means to revisit or replace the terms of an existing loan. A refinance when existing loan terms (interest rates, payment schedules, and other terms) are revised. When borrowers decide to refinance a loan, they effectively seek to make favorable changes to the loan terms (terms such as interest rate, payment schedules, or other loan terms). For debtors who find it challenging to pay off their loans, refinancing is the tool to get a longer-term loan and a lower monthly payment. However, the total amount the debtor has to pay will increase as the debtor pays the interest for a more extended period.
What Does Cosign Mean?
To cosign a loan means to sign that loan jointly with the primary borrower to guarantee payment. When you cosign a loan, you will be liable for the debt if the primary borrower cannot pay back the loan. In other words, a cosigner is an additional source of repayment for a borrower. This method helps the primary borrower obtain the loan as the consigner gives the lender little to fear.
What Is A Federal Housing Administration (FHA) Loan?
A mortgage insured by the FHA and issued by an approved FHA lender is known as an FHA loan. FHA loans allow down payments that are as low as 3.5% with a 580 Fair Isaac Corporation (FICO) score. FHA loans are helpful for buyers who have low credit scores or limited savings.
What Is A Signature Loan?
Signature loans (also called character or good faith loans) are loans that do not require you to present collateral before you can secure the loan. They are different from home loans, auto loans, and other secured loans. Signature loans are unsecured loans as they do not require you to put down any asset as collateral. All the lender needs are your signature, credit history, and income to get a signature loan. Good credit history and an income high enough to repay the loan will qualify you for a signature loan.
The Bottom Line
Whether you’re planning to buy a car, house, or a new sofa, some loans can suit your budget. The first thing to do before you even collect a loan is to set your budget, so you’ll know what you will be able to pay back monthly. Next, you need to get yourself familiar with the terms of the loan. If you fail to do so, you could end up in a debt spiral.
