What are the Different Types of Loans?

The process of seeking a loan is relatively easy if you know the specific loan type you want and what it entails. There are numerous loan types available, and each has its unique attributes and characteristics which makes it different from the others. You may be introduced to various loan subtypes. However, the other type of loans can be categorized into two major classes: secured and unsecured loans.

Secured loans are a category of loans backed by collateral. Lenders will require a borrower to provide a valuable asset as security for the loan. So, if the borrower fails to honor the loan, the lender can repossess the said asset. Secured loans are less risky and as such comes with flexible repayment terms and lower interest rates. Mortgage and auto loans are both secured loans.

Unsecured loans, on the other hand, are provided without any collateral security. The borrower enjoys the loan facility without the risk of losing any valuable asset. Since the lender bears the risk, unsecured loans have higher interest rates and are only available to people with higher credit history and substantial income and asset.

Popular Loan Types Include:

  • Personal loans
  • Mortgages
  • Student loans
  • Auto loans
  • Small business loans

Personal Loans

Personal loans are obtained from banks and financial institutions to settle personal expenses like medical bills, vacations, consolidated debts, home improvements and more. Personal loans are usually unsecured, which means you wouldn’t bring any collateral, making it riskier for the lender. And as such the requirements to obtain these loans is quite high. Approval is usually based on the borrower’s credit score, and the interest rate typically ranges within 5% to 36%.

Types of Personal Loans

  • Unsecured vs. Secured personal loans: as stated earlier, unsecured loans don’t require any collateral security and have stricter eligibility requirements and higher interest rates. Small loans are rarely secured; however, with a secured personal loan, the borrower will have an asset of equal or higher value than the loan amount. The lender will be listed as a lien-holder for the asset so that if the borrower fails to pay, the lender can recoup the losses from the sale of the asset.
  • Fixed-rate vs. Variable-rate loans: with a fixed-rate mortgage, the interest rate remains the same for the life-span of the loan. Repayment periods are also fixed from a few months to 5 to 10 years. While the interest rate and repayment periods for variable-rate loans are flexible and can change during the period.
  • Co-sign loans: this personal loan type is for people with a poor credit history that are ineligible for loans. So, they co-sign the loan agreement with another person who promises to repay if the borrower fails. The co-signer is expected to have a good credit history and assets.
  • Credit card cash advance: this allows you to use your credit card to get short term loans from your bank or an ATM. The interest rate for this loan type is usually high, and you may be required to make a down payment.

Mortgages

Buying a home is a massive investment which most people can’t afford, so the banks and lending institutions provide the required funds for homebuyers. Mortgages are usually secured loans, with the house acting as collateral, it also comes with a specific repayment period. There are several types of mortgage loans including:

Fixed Rate vs. Adjustable Rate Mortgages

These mortgage loans have a static interest rate and repayment amount for the whole period. The interest rate for adjustable mortgages fluctuates. It may increase or decrease within the entire term, thus changing the repayment amount.

Government-Insured vs. Conventional Mortgages

A government-insured mortgage is backed by the government, insuring the lender from the borrower. Government-insured loans include the Veterans Affairs loan, offered to military service members; the Federal Housing Administration loans, which provides as low as 3.5% rate; and the Department of Agriculture (USDA) and rural housing service (RHS) loan which is designed for low-income rural dwellers. Conventional loans are loans that are not backed by the government.

Student Loans

Student loans provide money to funds educational expenses. There are a variety of student loan options available in the market, and there’s a fierce competition between lenders. You have to search out the most suitable for your condition. Asides the private lenders, the federal government, also provides student loan facilities.

Federal Vs. Private Student Loan

The federal government loans have low-interest rates and are long term. Also, your credit history or financial status isn’t considered. You can get the loan even if you have a poor credit history. Private loans have higher interest rates and credit and income requirements. You may also be required to have a co-signer if you are younger. Some popular individual student loan options include:

  • Stafford Loans
  • Sallie Mae Student Loans
  • PLUS Loans

Auto Loans

Just like mortgages, Auto loans are usually secured to the vehicle and as such have lower interest rates. You can get this loan from the bank and financial institutions.

Other auto loans options include the following.

  • Dealership financing: most dealerships don’t only stop at providing you with the best model of the vehicle you desire; they also offer financing solutions in collaboration with financial institutions and lenders.
  • Lease buyout: Car leasing is a great option to own a car. You will only get to pay a monthly cost of using it, which is significantly low. You can also buy the car at a lesser price at the end of your lease agreement.
  • Equity Loans: this loan type allows you to use any valuable asset as collateral for your auto loan. It also comes with lower rates.
  • Online Car Loans: there are several online platforms offering auto loan services. The application process is less strenuous; however, a good credit score may be an eligibility requirement.

Small Business Loans

From time to time businesses need more money to carry out their activities or projects. Banks, credit unions and other financial institutions offer loans for small businesses. Government Agencies also offer loan packages to aid businesses.

Types of Business Loans

  • Short term vs. long term business loans

Short term loans span for a short period, mostly a few months to a year. The interest rates for short term loans are also lower, as the lender will recoup the money in a short time. Long term loans, on the other hand, cover a more extended period – a few years and has higher interest rates.

  • Alternative business loan options

Besides the traditional sources of funding, businesses may opt for alternative lending offers like online lending and crowdfunding. Applying for these loans is very simple and doesn’t require the problematic procedure and paperwork that comes with conventional lending.

There you have it, a list of the popular consumer loan types. Since the requirement for each loan type is different, having a good knowledge of the loan type you want will make your choice easier.

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