5 Jun, 2023

Understanding Different Loan Types - The Full Guide

Understanding Different Loan Types - The Full Guide
Written by: - Phil Baker

You might use loans to support you in achieving significant life goals, such as attending college or buying a house which you otherwise could not really afford. There are loans out there that can be utilized for a number of things, including paying off previous debt. Before taking out any loans, it's essential to understand the type of loan that would best fit your needs.

Despite the wide variety of loans available, taking the time to conduct thorough research will go a long way in assisting you in selecting the best kind of loan for you. In this article, we are going to help you understand the different types of loans that are available. 

Also read: How To Calculate Net Income

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What Is A Loan?

Typically, when you take out a loan, you sign a contract promising to repay the amount borrowed plus interest over a predetermined period of time. According to the sort of loan you pick out and your specific financial situation, elements of a loan including interest rate, loan term, eligibility requirements, and repayment options may vary.

When looking at loans, it's important to think about whether you want an unsecured or secured loan, as well as if the interest rate is set or variable. Depending on your intended use, you might also discover that you require a certain loan product or, if your credit history is extremely terrible, a bad credit loan.

Also read: What Does Annual Income Mean?

 

Personal Loans

Unlike mortgage and car loans, which already have specific purposes in mind, personal loans often have no restrictions on their use. For instance, some people get personal loans to pay for weddings, home renovations, or unanticipated bills.

Most personal loans are unsecured, this means they don't call for any form of security. You may have a couple of months to a few years to make the repayment. This is with either variable or fixed interest rates.

A personal loan can typically be arranged for between 100 and 1000 dollars with two and five year payback terms. For people who must borrow a fairly small sum of money and are confident they can repay it in a couple of years, a personal loan is usually the best option.

Also read: How To Calculate Retained Earnings?

 

Secured Loans

These loans need collateral, usually an asset like your home, so if you can't make your payments, you risk losing that asset. A secured loan, however, may still be appropriate if you have faith in your ability to make your payments on time. Even if your credit score is low, you might be able to acquire better rates or larger loan amounts with a secured loan. This is because the collateral reduces the risk for the lender. 

Secured loans often have lower interest rates than unsecured loans since they are less risky for the lender. Depending on the worth of the item used as security, they can frequently also come with larger loan limitations.

Also read: What Is Ach Payment And How Does It Work?

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Guarantor Loans

You must have a guarantor for these loans, someone who will guarantee that you will be able to pay back the debt. Although practically anyone who satisfies the lender's requirements can serve in this capacity, it is typically an elderly relative or acquaintance. 

These loans involve risk for both the guarantor and the borrower. Yet, hiring a guarantor can increase your chances of approval if you have a bad credit score.

 

Auto Loans

You are able to borrow the outstanding amount of the car's sales price with an auto loan, excluding any down payment. The automobile is used as collateral when the borrower stops making payments and could be repossessed. 

Although longer loan lengths are becoming common as auto expenses rise, the typical auto loan term is between 36 and 72 months.

Also read:8 Personal Finance Apps For Your Better Future

 

Student Loans

Graduate and college school costs may be offset with the aid of student loans. They are accessible from both commercial lenders and the federal government. 

Due to the availability of alternatives for deferment, forbearance, forgiveness, and income-based repayment, federal student loans are much more desirable. They are primarily provided as financial help through colleges and are financed by the U.S. Department of Education. Every borrower who applies for the same sort of loan will have the same terms, comprising fees, repayment schedules, and interest rates.

In contrast, private lenders often need a credit check for student loans, and each lender establishes its own loan conditions, interest rates, and fees. These loans do not have the same advantages as federal student loans, such as loan forgiveness or income-based repayment schedules.

 

Payday Loans

Payday loans are one kind of loan to stay away from. These payday loans are usually subject to fees with annual percent charges (APRs) of 400% or higher. Also, they must be fully returned by your next paycheck.

These loans, which are available from online and physical payday lenders, typically range in size between $50 to $1,000 and don't involve a credit check. Payday loans are simple to obtain. However, they are tricky to pay back on time, thus consumers renew them, incurring extra penalties and charges and spiraling further into further debt.

 

Bridging Loans

When you know the money you need will become available soon, a bridging loan is a loan which will fill a short-term financial gap.

Depending on your needs, bridging loans can either be "closed" or "open." A closed bridge loan will have a set due date, whereas an open bridge loan will not have a set due date. Yet, it will normally last up to a year. 

This is a secured loan with monthly interest payments rather than yearly ones. These short-term loans typically have higher interest rates compared to longer term loans. 

 

Credit Union Loans

A financial cooperative that is managed for the interest of its members is a credit union. Members of credit unions band together for mutual financial support, including pooling their resources to give loans with low interest rates.

Members frequently share characteristics with one another. They might live in the same community, work for the same company or employer, or be members of the same trade group.

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Business Loans

Business loans are intended exclusively for commercial usage. They can range in size from just a couple of hundred to even thousands of dollars. Lenders will consider the business's credit score, trading history, and profitability when determining whether to grant a loan application for a business. 

Each loan is different for each business, depending on what they are asking for and how strong their business is. For example, business working capital loans are short-term loans that companies use to cover operational expenses.

Final Thoughts 

There are various different types of loans out there for you to pick between. The type of loan you are after will depend on what you want the money for. In addition to this, you must consider how quickly you want or will be required to pay this money back. There are risks with all types of loans, however, some are far more secure than others.

We hope you have found this article useful. Now you should have a better understanding of the different loan types that are available to you. It is important to do your research beforehand to ensure you are choosing the right loan for you. 


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