Types of Loans
While auto and mortgage loans are designed for a specific purpose, personal loans can generally be used for anything you choose. Some people use them for emergency expenses, weddings or home improvement projects. Personal loans are usually unsecured, meaning they do not require collateral. They may have fixed or variable interest rates and repayment terms of a few months to several years.
When you buy a vehicle, an auto loan lets you borrow the price of the car, minus any down payment. The vehicle serves as collateral and can be repossessed if the borrower stops making payments. Auto loan terms generally range from 36 months to 72 months, although longer loan terms are becoming more common as auto prices rise.
Student loans can help pay for college and graduate school. They are available from both the federal government and from private lenders. Federal student loans are more desirable because they offer deferment, forbearance, forgiveness and income-based repayment options. Funded by the U.S. Department of Education and offered as financial aid through school, they typically do not require a credit check. Loan terms including fees, repayment periods and interest rates, are the same for every borrower with the same type of loan.
A mortgage covers the purchase price of a home minus any down payment. The property acts as collateral, which can be foreclosed by the lender if mortgage payments are missed. Mortgages are typically repaid over 10, 15, 20 or 30 years. Conventional mortgages are not insured by government agencies. Certain borrowers may qualify for mortgages backed by government agencies like the Federal Housing Administration (FHA) or Veterans Administration (VA). Mortgages may have fixed interest rates that stay the same through the life of the loan or adjustable rates that can be changed annually by the lender.
A home equity loan or home equity line of credit (HELOC) lets you borrow up to a percentage of the equity in your home to use for any purpose. Home equity loans are installment loans: You receive a lump sum and pay it back over time (usually five to 30 years) in regular monthly installments. A HELOC is revolving credit. As with a credit card, you can draw from the credit line as needed during a "draw period" and pay only the interest on the amount borrowed until the draw period ends. Then, you usually have 20 years to pay off the loan. HELOCs generally have variable interest rates; home equity loans have fixed interest rates.
Debt consolidation loans are a type of loan designed to help individuals pay off existing debts. They are usually unsecured loans that provide the borrower with a single, larger loan to pay off multiple smaller loans. These loans are typically used to reduce the amount of interest payments and reduce the amount of time it takes to pay off the debt. Debt consolidation loans can also be used to help lower the total amount of debt owed, as well as the monthly payments required to repay the debt.
Pay Day Loans
A payday loan is a short-term loan that is typically used to cover emergency expenses. It is generally a small loan that is due to be repaid on the borrower's next payday. Payday loans are typically unsecured, meaning that they do not require any collateral or security to be taken out. They generally have higher interest rates than other types of loans and can be a source of quick cash in times of financial distress.
- Personal loans and credit cards come with high interest rates but do not require collateral.
- Home-equity loans have low interest rates, but the borrower’s home serves as collateral.
- Cash advances typically have very high interest rates plus transaction fees.