11 Different Loan Types
Debt consolidation is the number one reason why Americans borrow money. However, there are many more reasons why you could be looking to get a loan, including medical emergencies, home renovations, and even vacations. Regardless of your reason for borrowing money, the most important thing is to understand different loan types.
There are many different types of loans available, but not all of them are made equal. To help you get started, we've listed and explained 12 types of loans for you to compare. We'll help you understand what each loan has to offer and whether you can qualify for the one you need most.
1. Secured Personal Loans
Personal loans are some of the most popular as they are easy to qualify for. There are two different loan types when it comes to personal loans. These are secured personal loans and unsecured personal loans.
To qualify for a secured personal loan, you need to offer the lender something as collateral. Whatever you offer needs to have enough value to cover the amount of loan you need. Collateral can be anything from your vehicle to a security deposit.
In the event that you're unable to completely pay off the loan, the lender will confiscate the collateral item and sell it to cover your debt. The biggest advantage a secured personal loan comes with over an unsecured loan is that it features lower interest rates.
This is because the lender faces lower risk if you're unable to pay off the loan as there is something to back it up. One of the best things about a personal loan is that you can use it for almost anything, whether it's a wedding, debt consolidation, or a vacation. If, for any reason, you are unable to pay off your loan, the lender will undoubtedly seize the collateral and sell it to recover their money.
2. An Unsecured Personal Loan
An unsecured personal loan is the complete opposite of a secured personal loan. This means that the lender will give you the money you need without taking anything as collateral. You can also use the money for anything you need.
When it comes to an unsecured personal loan, the requirements to qualify may be more strict. In general, to qualify for these types of loans, you're required to have a great credit score. It may be possible to qualify with a poor credit score, but you'll get better loan terms with a high credit score.
3. Payday Alternative Loans
Payday alternative loans are different types of loans from payday loans. They're short-term and offered by some federal credit unions as a more affordable option instead of payday loans. They come with longer repayment terms and feature lower interest rates as well.
Payday alternative loan amounts generally range from $200 to 1,000. Once you qualify, you can repay in one to six months instead of just a few weeks or the next payday. However, to qualify for a payday alternative loan, you're required to be a member of a federal credit union for about a month.
4. Medical Loans
There are many different types of what you can get for medical expenses, but you can specifically get a medical loan. You may be able to qualify for low interest medical loans, which are usually unsecured and cover different types of healthcare costs.
You can use a medical loan to consolidate an existing medical debt, cover an emergency or planned medical procedure. You can pay for plastic surgery, for dental work, or pay for high deductibles and out-of-network charges.
5. Home Improvement Loans
Home improvement loans are getting popular by the year as more and more people are looking to renovate. This is more so with the growth of the DIY market and more homeowners taking on projects on their own. The thing is, home improvement projects can be quite pricey, which is why homeowners feel the need to take a home improvement loan.
For instance, if you were to replace your roof, it would cost you a considerable investment. Typically, home improvement loans are unsecured and can be quite easy to qualify for if you have a good credit score. Still, if you want to minimize interest rates or are comfortable with a secured loan, you can opt for a home equity loan instead.
6. Home Equity Loans
A home equity loan is a secured loan where you use your home as collateral. You get a lump sum of money, although the amount is based on the value and equity of your home. Your home's equity is the difference between your property's market value and how much you owe on your mortgage.
Technically, you can't borrow over 85% of the equity. A home equity loan would be a good alternative for a personal loan or a home improvement loan.
Given that it's a secured loan, the interest rates are bound to be lower, and you can use the money for any purpose. On the downside, if you default on your loan, then foreclosure may be a possibility depending on your loan terms.
7. Pawn Shop Loans
There are many different loan types, and pawnshop loans are kind of different. The best thing about them is that they are very easy to qualify for as long as you have something of value to offer. They are also a fast cash borrowing option, so you can use them for an emergency.
You need to find a professional pawn shop in your area and take a valuable item, which could be jewelry or electronics. You'll get money based on the value of your item, and the loan terms will vary with the pawnshop. The interest rates may be high, but these are individual businesses, so it's usually up to the lender.
It'll be impossible for you to get your pawned item back until you pay the loan in full. The downside of this loan is that if you have a set time to pay the loan, the lender may sell your item if you default.
8. Title Loans
Title loans are secured types of loans, and you will place the title of your car as collateral to get the money. It can be any type of vehicle, truck, or recreational vehicle, and the loan limit could stand between 25% and 50% of its value. This value will be for the lender to decide after fully evaluating your vehicle.
Title loans can be quite expensive because lenders charge a monthly fee of about 25% of the loan. This brings it to an APR rate of about 300%. These are different loan types compared to traditional auto loans and RV lots.
This is due to the high interest rates, the fact that you give your title to the lender, and are short-term. These loans would fall in the same category as payday loans, and a lot of people consider that predatory. This is to say that you should only take them if you absolutely have no other option.
9. Debt Consolidation Loans
Debt consolidation loans allow you to streamline your current loans. What you do with a debt consolidation loan is pay off all other pending loans and remain with only one. This can make it easier for you because you'll only have one monthly loan repayment.
If you're currently paying high-interest rate loans such as a credit card loan, a payday loan, or a title loan, you can take a debt consolidation loan to cover all of them. This will halt three different interest rates, and they leave you with one. To maximize a debt consolidation loan, it's crucial that you shop around for a lower interest rate than what you already have.
You're likely to qualify for a good rate if you have managed to raise your credit score since you took out the current loans. If you qualify, the lender will either automatically pay off the debts for you or give you the money and let you do it yourself.
10. Credit Builder Loans
Credit builder loans are exactly what they sound. You take them so you can build your credit score and become eligible for other different loan types. Most credit builder loans are short-term, and the best part is that you can qualify with a bad or poor credit score since the main goal is to raise it.
The major difference with credit builder loans is that you'll not receive the money approach as you would are the different types of loans. The lender will give you a fixed monthly payment, and you'll pay in advance then receive the money once you're done. One of the best things about these loans is that they can be quite affordable and are a good way for you to build credit.
11. Student Loans
Student loans are very popular and have helped millions of people complete their education. They pay for tuition and fees in accredited schools, so you generally can't use them to pay for informal classes.
You can either apply for a federal or a private student loan, though a federal student loan comes with more benefits and better protection. However, they also have higher interest rates compared to private student loans.
Different Loan Types: Which One Do You Need?
If you're currently looking for a loan, these are the different loan types available in the market. You can choose the most suitable one depending on your needs and loan terms.
Your credit score and credit history will play a huge role in the kind of loan you qualify for. Beyond that, make sure you compare lenders to ensure you get the best loan terms and interest rates on the market.
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