Loans are a great way to finance a purchase or cover an expense. But with so many types of loans available, it can be hard to know which one is right for you. In this article, we'll explore the eight most common types of loans and their key features. Personal loans are a popular option for borrowers with good credit.
They come with low interest rates and flexible repayment options. To apply, you can usually do so online through a bank, credit union, or online lender. Auto loans are a type of secured loan that you can use to purchase a vehicle. The security of the loan is the vehicle itself.
If you don't pay, the lender will regain possession of the car. You can usually get car loans from credit unions, banks, online lenders, and even car dealerships. Some car dealerships have a financing department where they help you find the best loan from partner lenders. Others operate as lenders who “buy here and pay here”, where the dealer gives them the loan itself.
However, these tend to be much more expensive. Student loans are intended to pay tuition, fees and living expenses at accredited schools. This means that you generally can't use student loans to pay for specific types of education, such as programming camps or informal classes. If you have equity in your home, you may be able to use a home equity loan, also known as a second mortgage. The capital you have in your home, the part of your property that you own and not the bank, guarantees the loan. You can generally borrow up to 85% of the net worth of your home, which is paid as a lump sum and is repaid within five to 30 years. Payday loans are short-term, high-cost loans that generally expire on the next payday.
States regulate payday lenders differently, meaning that your available loan amount, loan rates, and the time you have to pay may vary depending on where you live. And some states completely ban payday loans. At first it sounds useful until you realize that even more fees are charged, trapping many people in debt obligations that may be higher than they originally borrowed.
Small business loansare another option for businesses looking for financing. There are several types of small business loans, including Small Business Administration (SBA) loans, working capital loans, term loans, and equipment loans.
These loans help small businesses - usually businesses with up to 300 employees - to finance their operations. Local businesses such as landscapers, hairdressers, restaurants or family grocery stores and sole proprietors such as freelancers who still have a traditional day job can also apply. Small business loans generally have more qualification requirements than personal loans, especially if you're applying for an SBA loan. However, the rewards are worth it because these loans can give your business the funding it needs to grow. Alternative business finance methods such as invoice factoring or cash advances for merchants can be more expensive, leaving small business loans as the best business finance option. Title loans are another type of secured loan where you pledge the title to a vehicle you own such as a car, truck or recreational vehicle as security.
Your loan limit is usually between 25 and 50% of the value of your car as assessed by the lender. Lenders that offer title loans also charge a monthly fee of 25% of the loan amount which translates to an annual percentage rate (APR) of at least 300%, making them an expensive financing option. Pawn shop loans are another type of secured loan where you pledge an item such as jewelry or electronics as collateral for a loan. The pawn shop will evaluate the item and if they offer you a loan it will normally be worth between 25 and 60% of the resale value of the item.
You'll receive a pawn penalty which you'll need when you return to repay the loan usually within 30 days. If you don't return or if you lose your ticket the pawn shop keeps your item to resell it and get its money back. The main types of loans include personal loans, home loans, student loans car loans and more. Each type of loan is useful for a different purpose and has different APR ranges dollar amounts and different repayment terms.
One thing that most types of loans have in common is that the borrower receives a lump sum up front and pays it back over time. But there are even exceptions to this such as loans for creditors. Some banks and credit unions allow borrowers to secure the loan with personal savings or another asset. Online lenders that offer secured personal loans generally allow you to borrow against your car.
Secured loan rates are generally lower than those on unsecured loans because they are considered less risky for lenders. Fixed-rate loans make sense if you want consistent payments every month and if you're worried about rising long-term loan rates. Having a fixed rate makes budgeting easier since you don't have to worry about your payments changing. Interest rates on variable-rate loans are linked to a reference rate set by banks depending on how the reference rate fluctuates your loan rate as well as your monthly payments and total interest costs may increase or decrease.
Variable-rate loans may have lower APRs than fixed-rate loans they may also have a limit that limits the amount your rate can change during a specific period and over the life of the loan. In conclusion, there are many different types of loans available depending on what kind of purchase or expense needs financing. It's important to understand each type before making any decisions so that you can make sure that you're getting the best deal possible.