What Kinds of Loans Are Available?
A loan is a sum of money that you borrow from a financial institution like a bank or credit union and agree to pay back with interest. This money can be used to make major purchases, cover expenses or fund new ventures. Knowing what kinds of loans are available can help you decide which kind is right for your needs. Loans come in many different forms and are used to finance everything from vacations to cars, houses and even medical procedures. Different loans have different features but most of them have four primary characteristics: principal, loan term, interest rate and installment payment.
Personal loans are typically based on the borrower’s credit score and may be secured by a physical asset like a home or car or unsecured, such as a credit card. The repayment schedules and terms vary by lender, but in general, a loan with a shorter payment term will have lower interest costs than a loan with a longer repayment term.
The most common types of personal loans are mortgages, auto loans, personal loans and credit cards. Some of these loans are provided by private companies while others are funded through public agencies and nonprofits. Public and nonprofit programs often have more specific eligibility requirements and better terms than other lenders.
There are many different ways to obtain a loan, including banks, credit unions, alternative (non-bank) lenders and online lending platforms. Some of these companies offer an entire loan process online, which can be faster than visiting a bank branch or dealing with a credit union. Another option is peer-to-peer (P2P) lending, where you apply to be considered by a group of individual investors who decide whether or not to fund your loan.
A key difference between a loan and a line of credit is that a loan gives you a lump sum you must repay over time while a line of credit allows you to spend up to a certain limit and then pay it back. Some lines of credit, such as a home equity line of credit, allow you to draw funds and only pay interest during the “draw” period. Other lines of credit, such as a credit card, charge interest immediately on every use.
Some loans, such as home and auto loans, are typically structured as secured loans with a lien against the collateral in case of default. Other loans, such as credit cards and personal loans are unsecured and are based on your income and debt levels. Beware of predatory lenders, which are companies that impose unfair and abusive terms on their customers through deception and coercion. Be sure to survey all options and consider speaking with a financial planner or attorney before you borrow any amount of money. Look for warning signs, such as interest rates significantly higher than competitors’ rates or fees that are more than 5% of the loan value. Also, never sign any document that doesn’t contain all of the information you were promised.