Common Types Of Loans Explained Simply

You can borrow money to use for nearly any purchase. You can borrow for anything from buying an engagement ring for your fiancée to funding a new business. Which is the best choice for you and what should you use it for?

Here’s a quick look at a few of the more common types of loans.

Personal Loans

Most banks, be they on Main Street or online, offer personal loans as one of their services. The proceeds from a personal loan can be utilized for anything you like. That said, this is a rather expensive way to get money.

The loans are generally unsecured. This means the borrower doesn’t need to have any sort of collateral that the bank can seize in the event of a default, like with a mortgage or a car loan. Generally, you can get a personal loan of up to a few thousand dollars and will have as long as 5 years to pay it off.

Credit Cards

Each time someone pays using a credit card, it’s essentially them using a small personal loan. If you pay the balance on the credit card immediately, you won’t be charged any interest. If even a tiny bit of the debt is left unpaid, interest will be charged on it each month until you pay it off.

Most interest rates are around 17%. Penalty rates for customers who miss even a single payment can be even higher than that.

Be careful about having too many credit cards though. See How Many Credit Cards Is Too Many?

Home Equity Loans

If you own a home, you might consider borrowing against the equity you’ve built up in it. Basically, what that means is that a home equity loan allows you to borrow against the amount of the house you’ve already paid for.

For example, if you’ve paid off half of your mortgage, you can borrow that amount, or if the house has appreciated, you can borrow half of what it’s worth.

If you’re interested in learning more, try Loan Depot.

Small Business Loans

You can get a small business loan from most banks as well as through the SBA (Small Business Administration). These are generally needed by people who’re either setting up a new business or attempting to expand a business that’s already been established.

These loans are only granted once the owner of the business has submitted what’s known as a business plan for review. The loan terms typically include a personal guarantee as well, meaning that the personal assets of the business owner are used as collateral in the event the owner defaults on the payments.

The terms of these loans can be for as long as 25 years. Sometimes, the interest rates can be negotiable. 

Credit Builder Loan

This type is a loan that features an uncomplicated process of approval and is designed especially for people who might need to build up their credit. Perhaps they had issues with paying their bills in the past or because they haven’t built a strong credit history yet. Most of the time, when you get a credit builder loan, you borrow less than $1,000.

The thing is, you won’t have access to the money until you’ve actually paid back the full amount. The borrowed money is put into a special savings account.

You make the monthly payments, and the lender reports those payments to the credit bureaus. Once you’ve completely paid it back, the lender releases the money to you.

Have you checked your credit score lately? Try CreditNerd.

Buy Now, Pay Later

Buy now, pay later loans are becoming increasing popular. They are exactly what they sound like they are. You buy something, and pay for it later. These are structured in different ways, but they are essentially taking advantage of emotional and impulsive buys.

Guarantor Loans

If you have a poor credit history, a lender may require you to provide a guarantor for your loan. These types of loans require two separate individuals to be responsible for the loan.

Typically someone with a bad credit score will ask a friend or a family member to co-sign the loan meaning that if applicant 1 is unable to keep up with loan repayments, applicant 2 will be responsible.  The co-signer assumes the risk of default.

In Conclusion: Types Of Loans

These are just a few of the more common types of loans. The most important thing when thinking about borrowing is whether or not you really need to buy whatever it is you are buying. Consider only borrowing when you need something, instead of when you want that thing.