What Type of Loan is Right For You?
Whether you’re taking out a loan to pay for school, purchase a new car or finance your home renovation project, the financial decision you make can have lasting consequences. It’s important to understand the different types of loans available so you can choose the right one for your needs. This article will take a look at nine common loan types and how they compare to each other in terms of loan length, interest rates and monthly payments.
A Loan is a sum of money that is borrowed from another party in exchange for future repayment of the loan value plus any associated finance charges or fees. The loan can be secured, which means that the borrower is required to pledge a specific asset like a house or car, or unsecured, meaning that the lender is lending money without any collateral attached to the debt. The loan may be a lump sum for a one-time amount or it can be offered as an open-ended line of credit up to a predetermined limit.
Loans are usually provided by a private entity, such as a bank or credit union, a government agency, such as the Federal Housing Authority (FHA), or an online lender, such as LendingTree. The most common personal loans include mortgages, car loans, student loans, credit card debt consolidation, personal lines of credit and payday loans. These loans are underwritten based on the borrower’s creditworthiness, which is calculated using a credit score.
While there are many benefits to obtaining a loan, it’s essential to weigh the costs and risks against your own financial situation before borrowing. The main benefit of a loan is access to funds that you otherwise would not have, but if you are not careful, a loan can become a significant financial burden. Some of the most significant risks of taking out a loan include high interest rates, a balloon payment at the end of the term and debt traps.
A loan can be a great way to cover large expenses that you are not able to afford with your savings. For example, wedding expenses, funding your child’s higher education or a home renovation are some of the most common reasons for people to seek out a loan.