What are the Different Types of Loans for Consumers?
Whether you’re buying a new car, paying for college or an unexpected expense leaves you in need of cash, there are different types of loans you can choose from. Loans can help you reach your financial goals, providing you with the capital you need to make big and small purchases when your means don’t quite match your needs.
What are the different types of loans?
Banks, credit unions and online lending platforms offer loans for a wide variety of financial needs. Read on to learn the basics about some of the most common types of loans.
- Personal loans
- Student loans
- Auto loans
- Mortgages
Personal loans
Lenders have created most loans for very specific purposes, but personal loans are an exception to this. Personal loans do have some common uses, though. You can use them for:
- Debt consolidation: In some cases, a personal loan can be more advantageous than a credit card when your goal is consolidation, with significant savings on interest.
- Medical expenses: Unexpected doctor and vet expenses can be outrageously expensive, sometimes necessitating a loan to help with the cost.
- Events: Weddings and other major events lead some people to take out small personal loans.
- Vacations: Vacations are another common reason to take out a manageable personal loan.
- Taxes: When tax time rolls around and you find yourself owing money to Uncle Sam, a personal loan can help you avoid the nasty fees of late payments.
- Home repairs: Extensive home updates lead many borrowers to pursue personal loans.
Secured and unsecured personal loans
Personal loans come in two options: secured or unsecured. In most cases, personal loans are unsecured, which means you don’t have to put forth collateral, like your car or investment accounts. With that in mind, the rates you get depend on factors like your credit score, income and credit history. Traditionally, rates for unsecured loans are higher than secured ones as they pose a higher risk to the lender.
How to get the best rates on a personal loan
You can get lower interest rates by using a cosigner, or even better rates by working to build your credit. While terms vary from lender to lender, personal loan amounts usually max out at $100,000 with term lengths between one and 10 years.
Personal loans come with fixed rates, a fixed borrowing amount, and fixed repayment terms, so you know what to expect from day one. When you apply for personal loans, be sure to look out for origination fees and prepayment fees, the latter of which penalizes you for paying off your loan early.
You can compare rates for personal loans with a platform like Lending Tree, which curates the best personal loan offers you’re eligible for from top providers. All you need to do is answer a few quick questions about your finances and what type of personal loan you’re looking for, and it will match you in minutes.
Student loans
The next most common type of loan you may run into is the student loan. Going to college is fun and exciting, but paying for it isn’t so great. Scholarships and grants should be the first place you turn, but these funds usually don’t cover the full cost of tuition.
Federal student loans
The next place to turn is to federal loans. These loans offered by the U.S. government come with low-interest rates and flexible terms that benefit undergraduate students, graduate students and parents alike. Some federal loans are even subsidized, which means they don’t accumulate interest while you’re enrolled in school.
Direct loans, which are one of the most popular types of federal student loans, don’t require a credit check at all. The other main type of federal loan, the PLUS loan, does look at your credit, requiring you to have either a fair credit score or a cosigner.
Direct and PLUS loans come with a grace period of six months after graduation, during which you don’t have to make payments. They also come with income-driven repayment plans and deferment options, in case you encounter a difficult financial situation and need to press pause on your payments.
The only thing you need to do to apply for a federal student loan is to complete the Free Application for Federal Student Aid (FAFSA) each year.
Private student loans
If you still find yourself in need of more funding, private student loans are a worthwhile option. Unlike federal student loans, private loans are funded by banks, credit unions and lenders who specialize in student loans. When you apply for a student loan, the lender will use your credit score, credit history and income to determine your rates and the terms of your loan.
How to get the best rates on a student loan
Generally speaking, private student loans come with higher interest rates and less flexibility than federal loans. They’re also unsubsidized, meaning you’ll be responsible for paying the interest your loan racks up during school. However, depending on your credit score, you could get a private student loan with comparable rates to a PLUS loan.
You can also refinance your student loans with a private lender, saving hundreds or thousands of dollars in interest. Start shopping with a student loan marketplace like Credible to see what rates you’re eligible for.
Auto loans
Auto loans can help provide the means for you to purchase a new or used car. Car loans come in a variety of shapes and sizes, with each lender setting its own criteria for borrowers.
In addition to looking into your credit score and income, many auto lenders have eligibility requirements for vehicles, especially for refinancing loans. Many car loan lenders require that a vehicle be no more than 8 to 10 years old, with varying mileage requirements.
Auto loan terms usually fall anywhere from 24 to 84 months. Though your payments may be higher, it’s smart to opt for an auto loan with a shorter term. Otherwise, you might end up upside down on your loan, owing more than the car is worth.
Before you sign off on a loan, consider your car’s value and how it might depreciate with time. Start by shopping for rates with a platform that only does a soft credit check with your initial application, keeping your credit score intact.
Mortgages
Your home is one of the most expensive purchases you’ll make, meaning a mortgage is one of the most crucial loans you’ll ever take out.
A mortgage takes the cost of buying a home and spaces it out over the span of a few decades. Most mortgages range between 15 and 30 years, with a 30-year mortgage being the most popular option for borrowers.
The shorter the term, the higher your payments will be. While short-term loan payments might be manageable with an auto loan on a $20,000 car, they’re a bit more difficult with a $300,000 home mortgage.
Types of home loans
The main types of mortgages are:
- Traditional mortgage: You can get a conventional home loan from a private mortgage lender backed by Fannie Mae or Freddie Mac. They come with the highest credit score requirement at 620 for a fixed-rate loan.
- Federal Housing Administration (FHA) loans: Offered to individuals struggling with their income and credit; the FHA backs these loans and they come with a credit minimum of only 500, with a down payment of 10% or higher.
- Veterans Affairs (VA) loans: Members of the U.S. military have the option of borrowing a VA loan. They come with zero down payment requirements, no credit minimum across the board and no mortgage insurance.
Whatever mortgage you choose, play around with the terms of various home loans to see which one fits best for your financial situation, making sure you’ll be able to stay on top of payments.
How the right type of loan can help you
Loans are often the keys to helping you unlock your goals and secure your futures. Borrowing any of the types of loans above requires mindful shopping, consistent payments and steadily improving and maintaining good credit.
This list of loans is by no means all-encompassing. People take out business loans and other forms of financing regularly. However, these loans are the ones people are most likely to take out throughout their lives, warranting a closer look.
Disclaimer: This story was originally published on July 26, 2019, on BetterCreditBlog.org. For more information on loans please visit: https://money.com/search/?q=loans.