Borrowing money isn’t bad if you know how it works and how to pay on time. For instance, taking a loan can be used for something meaningful, such as funding a business or buying a home. Whatever purpose you want to use the money, there’s a specific type of loan for you.
For those who need to borrow money, it will help to know and understand the different loan options offered by lending companies.
Student Loan
A student loan is borrowed from a private lender or the federal government to pay for college and graduate school. Both student loan sources have their own advantages and disadvantages.
Private lending companies that offer student loans have different sets of loan terms, fees, and interest rates. Loan applicants must go through a credit check to qualify for the student loan, and there’s typically no income-based repayment plan or loan forgiveness.
Federal student loans serve as a financial aid to college students. The loan terms, fees, and interest rates are similar for each borrower with the same loan type. There’s no credit check, and the loans come with income-based repayment plans, deferment, and forgiveness.
Auto Loan
An auto loan enables you to borrow money for buying a vehicle. This loan is a secured loan, which means the lender can repossess the vehicle if you stop making payments.
Loan terms vary across auto loan providers but typically last up to 36 months or 72 months. As the prices of vehicles are rising, it’s common to find longer loan terms.
Personal Loan
Individuals who get a personal loan can use it for different purposes. Typically, borrowers use this loan to cover house improvement, wedding, or emergency expenses. The loan terms range from a few months to years, with adjustable or fixed interest rates.
Most personal loans don’t need collateral. If you want to borrow this type of loan, check out GoodCheddar loans.
Mortgage Loan
The purchase price of a house can be covered by a mortgage loan. This is another type of secured loan, which means the lender can foreclose the property if you stop making payments. Mortgage loan terms range from 10 to 30 years, and there are adjustable rate or fixed rate options.
Traditional mortgage loans aren’t backed by government agencies, but there are borrowers who are eligible for mortgages insured by the Veterans Administration and Federal Housing Administration.
Payday Loan
A payday loan is money borrowed and must be repaid by your next payday. This loan option doesn’t require a credit check but it comes with a high annual percentage rate of up to 400%. Due to its short repayment term and exorbitant rates, payday loans hurl borrowers into a vicious debt cycle.
Credit-Builder Loan
Designed for people who want to improve their credit, credit-builder loans come with a fixed monthly repayment term ranging from 6 to 24 months. Typically, borrowers of this loan type don’t have to go through a thorough credit assessment.
If you want to take a credit-builder loan, you should ensure that your lender reports your successful repayment to major credit bureaus. This way, you’ll have a good credit history or fix any bad credit.
Home Equity Loan and Line of Credit
Borrowers can use as security the percentage of their home equity to borrow money. The amount of money you’ll borrow can be utilized for different purposes. You have two options when using your home equity: a home equity loan or a home equity line of credit.
A home equity loan provides you a lump sum which must be repaid with interest in monthly installments for 5 to 30 years. A home equity line of credit lets you draw from a credit line whenever you need money during a draw period that typically lasts up to 10 years. When the draw period ends, you need to repay the total amount for 20 years.
Takeaway
Before taking out a loan, borrowers need to understand the different loan options out there. The common types of loans available in the market today are student loans, personal loans, payday loans, auto loans, mortgage loans, credit-builder loans, and home equity loans or home equity line of credit. These loan options have different repayment terms, fees, and interest rates.
