A guide to the 5 most popular types of loans
There are nearly as many types of loans out there as there are people. Trying to get into and understand the world of borrowing can be overwhelming.
Whether you are looking to diversify your credit score, buy a house, or pay your bills at the end of the month – understanding how loans work and why they are so important will benefit you.
To get you started, here are the five most popular types of loans in America, and a guide to how they work.
#1 – Credit Card loans
Credit Card loans are the most common type of loan in most Western countries. In fact, they are so common that most people wouldn’t even consider them a loan.
Credit cards are short-term loans that are required to be paid off at the end of the month, every six months, or by the end of the year. The better your credit score, the less interest you will have to pay on the money you are borrowing. If you fail to make your payments on time then the interest you will be required to pay can increase by up to 20%.
Money can be borrowed on a credit card by using it to pay a bill or buy a product as if it was a debit card. Some borrowers may have a limit to how much they can borrow each month. While others, who have a better credit score, may have no limit.
Some companies even offer special lending programs for borrowers who gave excellent credit scores.
#2 – Personal loans
Personal loans are a subsection of loans that cover a few different types of loans. Personal loans are lent to a person and there is no limit to what they can spend the money on. You can get personal loans from CreditNinja.
The three most common types of personal loans are Personal Installment Loans, Quick Cash Loans, and Payday loans.
Personal Installment Loans are larger loans that are lent out over a longer period of time. They are good options for people looking to consolidate their debts or for people looking to do projects like upgrading their home before selling it.
Quick Cash Loans are exactly what they say they are. They are very short-term loans that offer the borrower a small amount of money. They are usually quick to apply for and banks have a fast turnaround time on approvals.
Finally, you have Payday Loans. These are also small loans that are only offered for between 2 and 8 weeks. They are designed to be paid back in a lump sum on the borrowers’ next payday. They usually have higher interest rates than other loans, but this means they can be paid back quicker than the average loan.
#3 – Car loans
Also known as Auto Loans, Car financing are loans that are designed to allow the borrower to rent or buy a car. Unlike personal loans, the money cannot be used on anything else.
The benefit of using an Auto Loan rather than a personal loan to buy a car is that the Auto Loan’s interest rates are usually lower. However, people who have bad credit may struggle to get an Auto Loan.
There are many different ways to get an Auto Loan – you can borrow money from your bank, from a home equity loan, from a credit union, or from the car dealership themselves. An auto loan is typically spread across 36-48 months, although the loans can be a lot longer.
One of the great things about Auto Loans is that the interest rate of the loan is based on the remaining balance of the loan. This means you can save money by paying your loan off early. This is not the case with most loans.
#4 – Mortgages
Most people are probably familiar with mortgages and what they are. Mortgages are large, long-term loans paid out by a credit union or a bank for the purpose of buying a home. They cannot be used on anything other than property purchases. Although sometimes, the bank may agree to lend you extra money so that you can renovate your home.
Mortgages are secured loans, this means that the loan is secured against the value of the property. If you do not make your payments then the bank or credit union is within their rights to repossess your home and ask you to leave.
The size of the mortgage is determined by a few factors, the credit scores of the people borrowing the money, the price of the home, and the size of the deposit that the borrowers have put together.
Once the mortgage is requested, the bank will agree to the sum of money they will lend, for how long, and the rate of interest that must be paid back as well. Interest rates will fluctuate over time, but you can choose to fix them at any point.
#5 – Small Business loans
The final type of loan that we want to talk about today is the Small Business loan.
You can get a Small Business loan from your bank or from your local Small Business Association (SBA). They are designed to help people who want to start a small business or want to expand their already existing small business. They should not be used for anything else, doing so can be considered fraud.
To get a Small Business loan you will be required to pitch your business plan to the lender and you may be asked to provide some personal collateral.
The amount of money you can borrow really depends on what your business needs and what the lender feels is safe to lend you. Small Business loans repayment plans usually range from between 4 and 25 years, but they can be longer than that. Again, interest rates can be fixed when the loan is taken out or can be left to fluctuate with general interest rates.