Loans come in many forms, because they’re tailored to specific needs. Whether it’s to attend school, purchase a car, buy a home, or consolidate your debt, the right loan can help you achieve your goals.
Since the loan terms can differ greatly as can the cost of borrowing, you need to find a loan that suits you and your life. Fortunately, most loans fall into several categories that can help you narrow your search. Let’s examine common loan types and terms you might encounter when you’re weighing your options.
Loan Terms You Should Know
You can obtain a loan from a bank, credit union, or reputable online lender. However, before you borrow you need to understand precisely what you’re getting yourself into. As a result, we’re providing you with this short glossary:
Secured loan – a loan backed by an asset known as collateral. The lender can seize the collateral if you do not meet your loan obligations. However, interest rates are generally lower.
Unsecured loan – a loan that is not backed by collateral. Interest rates are normally higher since the lender agrees to take on more risk.
Fixed rate loan – the interest rate on the loan does not change throughout the repayment term.
Variable or adjustable rate loan – the interest rate follows the prime rate. The lender may increase the interest rate if the prime rate exceeds a set baseline.
Open loan – the lender permits extra payments at any time, without penalty.
Closed loan – the lender charges a pre-payment penalty if you pay more than your scheduled payments.
9 Common Types of Loans
Any of the terms mentioned above could apply to the following eight loan types. For instance, you could have a secured closed personal loan with a fixed interest rate or an unsecured open personal loan with a variable interest rate.
Nonetheless, once you start shopping for a specific loan type you will discover that most lenders associate particular options with particular loans. That way you can compare apples to apples, not apples to oranges.
Luckily, if you discover the specific loan type you need you can quickly narrow the field. Otherwise, shopping for the right loan type can feel a bit overwhelming.
1. Personal Loan / Installment Loan
A personal loan is the most common type of loan used. It is suitable for almost anything including covering emergency expenses, buying a new television, moving, or taking a vacation.
Most personal loans are not backed by collateral. They can either have a fixed or variable interest rate and repayment can be over many years. The shortest repayment term is usually around a year, while the longest can be up to 12 years, or more.
The lender issues you a lump sum payment and you repay the borrowed amount plus interest through scheduled payments, or installments. Interest does not accumulate on the unpaid balance.
Instead, every payment pays a portion towards interest and a portion towards the principal. If you make timely payments, you could potentially improve your credit score.
An installment loan is popular, since some lenders don’t base approval on credit alone. If you earn a steady income paid by direct deposit, that may be enough to qualify.
2. Auto Loan
An auto loan is a secured personal loan backed by your vehicle. If you do not make your payments on your car, the lender can repossess your vehicle.
You pay a down payment and then borrow the remaining amount. Your auto loan may have a fixed or variable rate.
Terms on auto loans vary greatly. Some are as short as 36 months, while others are as long as 120 months. However, anything over 60 months is usually not recommended, because vehicles devalue so quickly.
Options for auto loan payments may include monthly, bi-weekly, or twice a month so you can choose whatever one aligns with your pay schedule. You may enjoy a slightly shorter repayment term when you pay more often.
3. Student Loan
Student loans are available through the federal government and private lenders. They can help pay for college and graduate studies.
Federally-granted loans are more desirable, since they offer more options. Plus, these loans usually don’t require a credit check and offer equal terms for all borrowers. Benefits include:
- Forbearance – payments may be paused under certain circumstances
- Deferment – payments may be stopped due to health, economic hardship, military training, and other situations
- Forgiveness – alleviating debt after a certain period or under qualifying circumstances
- Income-Driven Repayment – monthly payments based on family size and income and potential for loan forgiveness after a set number of years.
Private lender loans do require a credit check and loan terms can vary widely. They seldom offer the government benefits mentioned above either.
4. Mortgage
A mortgage is a collateral loan backed by your property. If you miss payments, the lender can foreclose and take back the property.
When you buy you pay a down payment and borrow the remaining amount. Typically, repayment occurs over 10, 15, 20 or 30 years. A mortgage can have a fixed or adjustable interest rate (ARM).
Conventional mortgages are offered through private lenders or the two government-sponsored enterprises: Fannie Mae and Freddie Mac.
Government agencies such as the Federal Housing Administration (FHA) and Veterans Administration (VA) also offer mortgages with lower down payments and interest rates to those that qualify.
5. Home Equity Loan
A home equity loan allows you to borrow a percentage of the accumulated value of your home. That’s the difference between what you owe and what it’s worth.
Generally, lenders offer up to 80% of your home equity as an installment loan. You repay what you borrow plus interest through regular payments over a set time. These loans may offer a lower interest rate and up to 30 years to repay. However, you do need decent credit and a reasonable debt-to-income ratio.
Additionally, this is a secured loan which relies on your home as collateral. As a result, the lender can seize the asset if you don’t meet your loan obligations.
6. Home Equity Line of Credit (HELOC)
A HELOC is not the same as a home equity loan. It is revolving credit like a credit card where your maximum available credit replenishes when you pay off what you owe.
Most lenders allow draws on your credit amount for up to 10 years. You only pay interest during this period. Repayment may range between 10 and 20 years, depending on the lender and your financial situation.
A HELOC generally has a variable interest rate. Consequently, you can’t accurately gauge your cost of repayment.
7. Credit-Builder Loan
As the name suggests, a credit builder loan helps those with little or poor credit to improve their credit score. Often times, these loans do not require a credit check since it is a given that your credit isn’t great.
The lender deposits money into a savings account. Typical credit builder loans range between $300 and $2,000. The money you borrow is held as collateral as you make monthly payments. Once you pay off your loan, the money is released and some lenders reimburse you for part of your loan interest too.
The most important factor to look for in a credit builder loan is that they report your timely payments to all three credit reporting agencies: Experian, TransUnion and Equifax.
8. Debt Consolidation Loan
A debt consolidation loan is a personal installment loan that can help you pay off high-interest debt. An example is taking out a loan at a lower interest rate to pay off your credit cards. A debt consolidation loan may have a fixed or variable interest rate.
This type of loan may help you in several ways. First, it simplifies your finances since you pay one payment instead of many. Next, paying off your debts can lower your credit utilization ratio, which may improve your credit score.
Debt consolidation is only beneficial when you curb your spending. Otherwise, you could end up with a loan payment and more credit card debt.
9. Payday Loan
A payday loan offers quick cash without a credit check. However, it is also one of the most expensive methods of borrowing, with the average annual percentage rate sometimes as high as 600%.
In Missouri, you can borrow up to $500 with repayment between 14 and 31 days. This quick repayment term makes it difficult for many people to repay on time. Consequently, the end up in a vicious cycle or borrowing again and again.
Since the requirements for a personal loan are often very easy, it makes more sense to use one of them. You may even qualify with a low income. A good online option provides fast cash, a higher loan amount, better terms, and a much better borrowing experience overall.
What Type of Loan Has the Lowest Interest Rate?
Generally, secured loans have lower interest rates than unsecured loans. However, you are also using your asset as collateral and could potentially lose it if you don’t make your payments.
Furthermore, much depends on the lender, your credit, and the product you choose. For instance, if you choose a longer term you may pay a higher interest rate since it increases lender risk.
Almost all lenders look at your credit score and debt-to-income ratio before they decide what they will offer you. The key to good interest rates is to maximize your credit score.
For those with less than pristine credit, it is still possible to borrow. However, you should expect to pay higher interest rates.
The Bottom Line on Choosing the Right Loan Type
Hopefully, you now know which loan type might suit your needs. However, you may still be wondering how applying for a loan affects credit scores and whether it is better to get an online vs in-person loan.
Once you’ve got your answers, you’ll be happy to know that FlexMoney offers online loans in Missouri of up to $1,500 with one year to repay. If you earn a steady income paid by direct deposit, you may qualify for one of our installment loans.