A loan is defined as a sum of money you borrow and is expected that you pay it back, all at once or over time, but with interest. Conditions for repayment for every type of loan are governed by state and federal guidelines to protect consumers. People need loans for different reasons – education, home purchases or just general living expenses, so naturally, there are different types of loans to consider.
Usually, consumer loans are offered as installment loans. They are given in one lump sum and are paid back over time in monthly payments. Lenders will consider the credit score and debt-to-income ratio before deciding what the loan amount will be.
There are two types of installment loans: secured or unsecured. Secured loans are backed by collateral, which means that lender can seize the certain asset that was offered as collateral, in case the loan isn’t being paid back. Unsecured loans, on the other hand, are not secured by collateral which can present a problem for lenders in case a customer defaults.
The consumer can also choose between fixed-rate and variable-rate loans. With fixed-rate loans, the monthly payment and rate don’t change and stay the same during the life of the loan.
Interest rates on variable-rate loans depend on the fluctuations of the benchmark, so the rate is susceptible to changes as well. These can be a reasonable choice only in case the repayment term for the loan is short.
The mortgage is a type of loan consumers opt for when they need to finance home purchases. The most common loan of this type is the 30 years fixed-rate mortgage. That means that the loan will be repaid by monthly payments over the course of 30 years. This process is called amortization. There are also various types of mortgage loans: conventional, FHA and VA.
Auto loans are used in case a consumer wishes to buy a vehicle, either new or used one.
The term for this loan is often from 24 to 60 months. In the case of an older car purchase, lenders will often limit the term to 48 or 60 months. Since car value rapidly declines with time, consumers should always opt for shorter loan terms. Title loans are secured loans where borrowers use the vehicle title as collateral. The problem is they are illegal in many states. However, in certain places, for instance, title loans in Hollywood Florida are legal.
Student loans usually have lower costs and can be considered low-risk loans since interest rates are fixed, and interest can be subsidized. Subsidized type of student loan is for students with the highest financial need, while the unsubsidized loans are meant for an average student.
Often students don’t have to start paying the loan back before they are out of school.
Personal loans, unlike car loans and student loans, can be used for all kinds of different purposes. The consumers choose this type of loan in order to cover living expenses, vacations or debt consolidation. The terms also vary greatly, but the maximum amount for a personal loan is typically $100.000. Here, consumers can also choose between secured and unsecured loans.
Credit card debt is what often raises a need for a personal loan.