There are many different types of loans. So, there’s a loan for every situation. Finding the right loan is important to ensure you get the right product for your needs.
Let’s go over a few things first.
Unsecured and Secured Loans
Loans are either unsecured or secured.
Unsecured loans require no collateral. Lenders will approve unsecured loans based on income and credit history and score. Your interest rate is usually dependent on your credit score with higher rates for those deemed higher risk. Examples of unsecured loans include personal loans, debt consolidation loans, student loans, and any purpose loans.
Secured loans require collateral. It’s tied to an asset that can be seized and sold in the event of loan default. These loans are auto loans tied to a vehicle, home loans tied to a house, or a secured personal loan tied to a savings account. Rates are usually lower compared to unsecured loans.
Fixed or Variable Rate
With both loan types, the rates can be a fixed-rate or variable rate. A loan with a fixed-rate will not have rates fluctuate. The rate and payments stay the same until the term and balance are paid off. The rates on a variable rate loan can rise and fall depending on market conditions but usually capped.
What are Loans Used For?
You can take out a loan for a number of reasons. For instance, financing a home purchase, auto purchase, education, and debt consolidation or for business purposes.
Common Loan Types
Most loans are installment loans that are a type of loan where you borrow a fixed amount of money at once and repay the loan over a set number of payments, referred to as installments. The most common loan types are mortgages or home loans, student loans, auto loans, and personal loans (used for a variety of purposes). For approval, a lender will look at your credit score and debt-to-income ratio to determine your actual interest rate and loan amount.
|Loan Description||Typical Term Lengths||Secured or unsecured|
|Home Loans||15 or 30 years||Secured|
|Student Loans||Varies based on the student loan.||Unsecured|
|Auto Loans||2 to 7 years||Secured|
Home loans are mortgages or home equity loans. Mortgages are used to purchase homes and make affording a home possible by spreading the cost of a large purchase over many years. The most common mortgage term is 15 to 30 years. The mortgage is paid with fixed monthly installments.
A home equity loan or a second mortgage is a loan that places a security interest on the home. It can be used for home remodeling or any other purpose. Since the loan is collateralized with the home, the interest rates are lower than a personal loan.
Student loans are either federal or private loans. Federal student loans are subsidized or unsubsidized and have fixed interest rates and don’t have to be repaid until after graduation.
Federal unsubsidized are available for most borrowers regardless of financial needs. Whereas, Federal subsidized are offered to students with the highest financial needs. There are federal caps to the number of student loans you can take. Additionally, federal student loans have benefits such as deferred payments, student loan forgiveness, and loan repayment plans.
Private student loans are offered by private lenders (banks and financing companies) and require underwriting that takes into account income, credit history, and cosigners for approval. Rates and loan amounts are based on the individual financial situation. Private loans can be fixed or variable rates. They may require payments while in school.
Additionally, student loan refinancing loans are available to consolidate your federal and or private loans into one manageable loan.
A personal loan is for any purpose. Loan amounts and rates may depend on income, credit history, and debt-to-income ratio. You can use personal loans to finance a car, pay for a wedding, consolidate credit card debt, take a vacation, finance big-ticket appliances, and more. Terms for personal loans depend on the lender and can vary greatly.
An auto loan is for a new or used vehicle purchase. The term for auto loans can vary from 24 to 60 months or more. Some lenders offer 72 to 84 months but I’d recommend not spreading payments that long as the car value depreciates quickly. Auto loans are collateralized and in the event of default, the car can be repossessed.
Other types of loans
Many lenders offer other loan types such as motorcycle loans, RV loans, boat loans, payday loans, and more.
Where can you apply for a loan?
You can apply for a loan with your current bank or credit union or use a loan comparison website to get a preapproval. Get a loan preapproval without impacting your credit score with Even.
And check out your other loan options on the financial marketplace.