Financial institutions provide various types of loans with a wide range of features. They could be short-term loans, large long-term loans, or even small lump-sum amounts. The loan you should choose will depend on your financial status, the level of risk you want to take, and your unique requirements.
People looking for immediate finances for a wedding or a medical emergency often take personal loans. Those who are looking to buy a property or pursue higher education opt for mortgage loan or student loans respectively.
Before you decide to take a loan, make sure you understand their features and align them with your needs.
8 Types of Loans You Should Know About Before Borrowing:
1. Personal Loans:
Car loans and home loan are designed specifically for a purpose. Personal loans are not need-specific in the sense they can be availed for different purposes. Some borrowers could use them for medical emergencies, others for travel plans, and others for a family function or home renovation. Personal loan are unsecured. While you don’t need to provide any collateral, it means you need to pay a higher rate of interest.
2. Auto Loans:
While buying a car, people take on auto loan to pay for the vehicle not counting any down payment that has been made. The vehicle in question is seen as collateral and the lender can repossess it in case the borrower stops making payments.
3. Student Loans:
A student loan helps students to pay their college fees and other related expenses. Student loan are provided by both private companies and government organizations. A government loan is often preferred since it offers more flexible repayment options and higher leniency.
4. Mortgage Loans:
Mortgage loan cover the price of a home during purchase, not including the down payment made. In this case, the property is the collateral that the lender can foreclose or repossess if any payments are missed. Generally, mortgages have longer tenures, ranging from anywhere between 10 to 30 years. A mortgage is not typically insured through government agencies. A mortgage could have either a fixed rate of interest that remains the same through the loan tenure or a floating rate that changes through the tenure.
5. Home Equity Loans:
A HELOC (home equity line of credit) or home equity loan allows a user to borrow a fixed percentage of their home equity for any purpose. It is an installment loan. Borrowers receive this amount as a lump sum and need to repay it in monthly installments. The tenure for home equity loan can range from 5 years to 30 years. Home equity loan are based on revolving credit. It means, like with credit cards, you can withdraw money on credit whenever you need it during the draw period and pay interest only on the credit amount borrowed till this period ends. After that, you have at least 20 years to repay the loan. A HELOC usually provides a floating interest rate.
6. Credit Builder Loans:
This type of loan has been created for people who have no credit or poor credit. Credit builder loans help you to improve your credit and might not need a background credit evaluation. In such a situation, the lender adds a fixed loan amount to a savings account. As the borrower, you need to make monthly payments for 6 to 24 months. On completion, you get your money back.
7. Debt Consolidation Loans:
It is a type of personal laon created to help pay back high-interest loans or credit like credit card bills. Such a loan helps you save money on the interest rate that you need to pay to credit card companies by giving you a lower rate of interest. Debt consolidation also helps you to organize your finances by repaying just one lender instead of multiple providers. It can also reduce credit utilization ratios and improve credit scores.
8. Payday Loans:
If there is a type of loan you should avoid, it’s a payday loan. It is a short-term loan that generally charges a fee equal to APRs (annual percentage rates), sometimes amounting to 400% and more which you must pay back the next time you receive your salary. These loans are usually provided by online or private lenders. Payday loans are generally easy to get but impossible to repay by the next payday. Consequently, the loan gets renewed and triggers a debt cycle of high interest and feeds.
Several loans can serve the same objective. However, comparing different types of loans and using a personal interest calculator can help you understand key differences to make the right choice.
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