You need cash to pay for unexpected car repairs, but payday is still a week away. Or maybe you want to enjoy your vacation without having to constantly check your bank account balance. It may be time to take advantage of a loan!
There’s a loan for just about every situation or financial need you can think of, from repaying debts to buying a surprise gift to purchasing a house for your growing family. But the sheer variety of loans available can make your head spin. How can you know which loan is right for you?
Good news – today, we’ll dive into all the different types of loans, including common and popular loans like personal loans and mortgages. Let’s get started!
Before we get into specific loan types, let’s break down two loan attributes: their interest rates and their security status.
Fixed-rate loans are simple. They have a fixed or static interest rate that never changes regardless of how the prime rate fluctuates or other factors. Fortunately, most personal loans have fixed rates. With fixed-rate loans, your payments or installments stay the same for the entire lifetime or term of the loan.
With fixed-rate loans, calculating how much you’ll pay over the loan term is easy.
Variable-rate loans, on the other hand, have variable interest rates. They’re usually tied to benchmarks that are set by banks and/or the prime rate. So, your interest rate may vary from month to month.
In some cases, you might get lucky and benefit from a lower interest rate. But during other months, the bank might raise your interest rate higher than it would have been with a fixed-rate loan.
So, which is better? It depends on the repayment term.
Variable-rate loans might make sense if you have a short-term loan since you might benefit from the lower-than-average interest rate. With short-term loans, you could possibly pay off the loan before the interest rate increases.
Fixed interest rates are the safer option for long term loans. You’ll know your exact payment each month and be protected from any variable interest spikes during the loan’s term.
Loans can also be secured or unsecured.
Secured loans have collateral, which is property, money, or anything else that can be seized by the lender if a borrower defaults on the loan. Secured loans are beneficial for those who don’t have the best credit, making financing accessible to everyone. Collateral also helps lenders feel more secure lending to people since they know they can recover their funds, even if the borrower doesn’t repay their loan in full.
Unsecured loans are the opposite: they don’t have collateral attached. So, they usually require higher credit scores or more confidence in the borrower for a lender to offer a contract. However, unsecured loans are safer for the borrower since their property or money isn’t at risk. Of course, a borrower’s credit score can still drop sharply if they don’t repay their unsecured loan on time.
Depending on where you look, there’s a loan for anything you can imagine – buying a new piece of quality furniture, renovating your home, repairing your car, or even starting a new business! Let’s look at some of the most common types of loans.
Mortgage loans are everywhere – after all, very few people can afford to buy a house outright, especially if it’s their starter home. Mortgages can be fixed or variable-rate and come in several different subtypes, Including:
A home equity loan/line of credit is a special option you may receive when you buy a house. In a nutshell, you can borrow money from your lender against any equity you’ve already built up with your house. In most cases, you’re only allowed to borrow up to the amount of equity you fully own.
For example, say that you’ve paid off half the mortgage of your house. In that case, you can borrow up to half of the value of your home if you take out a home equity loan or home equity line of credit (HELOC).
Borrowers sometimes take out these loans to start new businesses, finance home renovations, or pay off other debts.
Small business loans are straightforward; you request them from financial institutions like investment firms or angel investors. These loans are used to finance the start or growth of a small business by paying for things like property, equipment, and so on.
Since it usually takes a couple of years for businesses to turn a profit, many small business loans are also written with lengthy terms, such as five years or more.
Auto loans are common just like mortgage loans, as most people don’t buy new or used cars outright. Auto loans can include fixed or variable rates and come in a wide range of terms and conditions. Those terms can make them attractive depending on your budget and how long you plan to use the car.
Just like mortgage loans, many auto loans have better terms if you pay down more of the car’s cost upfront.
Aside from auto loans, specialized loans for other vehicles including boats, RVs, and even aircraft are also available from specific lenders or even from vehicle manufacturers. These loans may have special terms or interest rates to make them more attractive.
However, keep in mind that you can usually find better vehicle loans from dedicated lending institutions like Regional Finance.
Land loans are given to individuals or business who plan to develop parcels of land, build a home, or harvest natural resources. Land can be very expensive, so even established businesspeople may need to take out land loans, which come in two types:
One of the most common types of loans, personal loans are available for a wide range of needs, including:
Because personal loans are used for many things, their lenders are usually flexible with the needs for funds. Personal loans are also available with a wide range of APRs, term limits, and fees.
Typically, the better your credit score, the better your access to loans.
Medical loans are used for medical bills that exceed a borrower’s insurance coverage. Medical loans usually come with fixed APRs to offer more stability, and they may be offered by medical organizations, hospitals, or other lenders.
Student loans are offered by both the government and private lending institutions. They’re meant to cover the cost of college education, including tuition, room and board, textbooks, etc.
In many cases, student loans come with better terms or APRs if the borrower has excellent grades, good credit, or other indications of future payment reliability. While they can be useful, keep in mind that most student loans require a co-signer since most first-year students don’t have the credit history to qualify for a loan themselves.
Some credit cards allow you to take out a cash advance which is essentially a short-term cash loan. While these can be convenient ways to get some quick cash, they can also be expensive. Interest rates are usually very high and these loans often come saddled with extra fees, which can be a set dollar rate or a percentage of the total amount you borrow.
Since you must withdraw the cash, only banks and credit card companies with ATMs offer cash advances.
Debt consolidation loans are specialized loans used for one purpose: to pay off several other outstanding debts to make debt repayment more manageable.
For example, imagine that you have three separate credit card bills eating into your savings and accruing interest with three different APRs. A debt consolidation loan, taken out for the combined total of all three credit card bills, will let you pay off all three credit cards immediately.
Afterward, you’ll only have one bill from one lender with one interest rate. Debt consolidation loans simplify your finances and make debt repayment much easier. That’s why Regional Finance offers debt consolidation loans for those who qualify – check out our page on these loans for more information.
Just as there are loans for those with excellent credit, there are loans for people with fair to poor credit. In many cases, these “bad credit” or credit builder loans are offered by institutions that report to all three major credit bureaus: Experian, Equifax, and TransUnion.
By taking out one of these loans and paying bills on time, a borrower can build their credit progressively while having the loan’s money when they need it most. However, lots of bad credit loans also come with higher than average APRs, extra fees, or other strings attached.
References accessed 8/8/2021 –
Experian – What is a Government-Backed Mortgage?
CNBC – Secured Loans vs. Unsecured Loans
You can prequalify for your personal loan online in just minutes by clicking prequalify now. Or, if you prefer, call or stop by your local branch to get the process started. Our loan specialists can answer any questions you may have such as what a personal loan is, understanding personal loan interest rates, and how to qualify for a personal loan. We’ll help you fill out an application for the type of loan that fits your needs.