Most people need to borrow from time to time. Maybe there’s a sudden need for an expensive home repair, or you might choose to borrow to buy a car. Whatever the reason, having access to loans can be vital.
That said, you should not take debt lightly. There are many types of loans, and they can all serve people in different ways. Borrowers should learn about the types of loans and how they can be used. Knowing about loans can help you make better financial decisions.
Read on to learn about common types of loans.
Personal Loans
This is one of the most common loan types. You can find various types of personal loans from banks and other financial institutions. Most of these unsecured loans can be used for almost anything. Since they are unsecured loans, they tend to cost more than loans backed by collateral. The lender usually releases the money in a lump sum, and the borrower pays it back monthly. Banks are also strict about the requirements for obtaining an unsecured loan.
Car Loans
Buying a vehicle is a significant cost for most people. You might not want to empty your bank account when buying a car, even if you have the money. That is why auto loans are so standard. Banks and credit unions often have loan products to help consumers buy vehicles. Car dealerships may also offer loans to help buyers finance vehicle purchases. In the case of auto loans, the vehicle serves as collateral for the loan.
Mortgages
Mortgages are loans people use to buy homes. It is the most significant type of loan most people take during their lifetimes. With a mortgage, the property is security for the loan. If the borrower defaults, the lender could seize the property.
Beyond approval for the loan, the borrower must make a down payment to obtain a mortgage. Most mortgages are for terms of at least fifteen years, with 30-year mortgages being the most common. However, you should understand various types of mortgages before buying a home.
Home Equity Loans
A home equity loan can be helpful for homeowners. As you pay your mortgage, you build equity in the home. Once you have enough equity, you can borrow against that value. These loans are advantageous because using equity as collateral allows for lower interest rates. However, default comes with the risk of losing the home. Typically, you need at least 20% equity for this loan. Most lenders will also limit loans to 80% of the total equity.
Reverse Mortgages
Older homeowners might consider reverse mortgages. It offers a way for people over 62 to borrow against their homes. What makes them even more beneficial is that you might only need to pay the loan once you move or pass on. However, you have many options for reverse mortgages.
According to All Reverse Mortgage, a company that helps people compare and find reverse mortgages (https://reverse.mortgage/how-does-it-work), “Not all reverse mortgage products are equal. Some pay out in different ways, and there are varying terms. Consumers should take the time to research loans before accepting a reverse mortgage.”
Cash Advance
This loan product offers consumers cash when they need it in a hurry. Access to quick cash can be advantageous if you run into an emergency that won’t wait for other loan products. However, they tend to come with unfavorable terms. The interest is usually high, and most are intended as short-term loans. You can find online services that offer cash advance loans. Most credit cards also have a cash advance feature.
Debt Consolidation
A person’s debt can get out of hand for many reasons. However, it can be hard to manage if you have several debts. A debt consolidation loan is one way to get things in order. With debt consolidation, you take one large loan to pay off several smaller loans. It makes it easier to handle by putting everything in one loan. It can also help if the debt consolidation loan has lower interest than the other debts. There are also debt forgiveness programs available, so it pays to research your options with a debt counselor.
Payday Loans
A payday loan is another option for a person who needs cash quickly. Maybe an expense arose, and you can’t wait for your paycheck. It is a short-term loan, and as you might guess, the borrower intends to pay from their next paycheck. While these loans can be helpful in a pinch, the interest rates and fees tend to be high. Many people and organizations consider it a type of predatory lending.
Borrowing can be helpful, but you need to be careful. Selecting the correct type of loan is the first step in ensuring an intelligent financial decision. After that, you must compare offerings from different lenders.
