What Are the Different Types of Loans?
A loan is a type of debt that involves giving someone money with the expectation that they will repay it in full over time, typically with interest. This is a common way for banks and other financial institutions to give people funds they need to purchase a new car, home or start a business.
Loans come in many forms, and each one is unique. Understanding the different terms and costs involved can help you determine which ones are right for you and your budget.
Principal: The amount of money you borrow is called the “principal.” You typically pay back this amount over a period of time, often at a regular cadence, usually monthly. Your lender may ask you to sign a contract to repay the loan in full at a certain date.
Interest: The cost of the loan is the interest rate, which is the amount you will have to pay back in addition to your principal. This is determined by the lender and your credit score, as well as the term of the loan and other factors.
Installment payments: The amount you pay each month is known as your installment payment. This can be a fixed amount, or it could be variable based on your income.
Term: The amount of time you have to repay your loan is known as the term, and it can range from several weeks to several years.
Lender fees: Some lenders charge fee for loan processing, application and origination fees. These fees are typically disclosed on the loan contract or on the lender’s website, but they aren’t always included in the interest rate or APR.
Credit unions: Some credit unions offer low or no fees and competitive rates on loans. They can also offer free checking accounts and other benefits for members.
Banks: Most banks offer loans to individuals and businesses, as well as a variety of other services. Some of these offerings include savings accounts, mortgages and credit cards.
Personal loans: These loans are available from nearly all lenders, and can be used for just about any purpose. They’re a good option for those who need to cover a large expense, but should only be used when you can afford to make the monthly payments.
Cash advances: These are a fast way to get money, but you can wind up paying more in fees than the amount you withdraw. Most are capped at a few hundred dollars, but they can be costly if you’re not careful.
Borrowers who take out these loans often end up with high balances, making it difficult to make payments on time. This can damage their credit and credit history, which could affect future loans.
Getting a loan is easy, but it’s important to shop around for the best deal. Before you apply, compare costs and terms from at least three lenders.
Once you find a lender that fits your needs, verify your information and submit an application. You’ll need to provide evidence of your identity, income and residency. Most lenders will want to validate these documents to ensure you’re a legitimate customer and will be able to pay your loan back on time.