If you want to buy a house or pursue higher education, you will probably need a loan. Thowever, there are many different types of loans, and they can be confusing. here are the big guys who you should know (and you should read this economic glossarytoo).
The basics of a loan
A loan is money (or sometimes property or other physical property) given by a lender to a borrower on the understanding that the borrower will repay it with interest. Banks usually give loans to individuals or organizations.
Here are some of the main types of loans, by Experian Financial:
- Personal loans are loans that can be used for essentially whatever the borrower wants, which differentiates them from car or education loans. They can be used for emergencies, weddings, renovations or any other major expense.
- Car loans are designed to allow you to borrow the cost of a car you are considering buying, but they do not cover a down payment. The vehicle itself will serve as collateral and can be resumed in case you do not pay regularly.
- Student loans are used to pay for undergraduate or graduate studies and can be granted by the federal government or private lenders. You’ll usually want a federal one, as they offer deferral, income-contingent repayment options, and other perks.
- Mortgages cover the purchase price of a home, but like auto loans, they don’t cover a down payment. Like auto loans, they come with guarantees: your home can be foreclosed on if you don’t pay regularly. Some mortgages may be guaranteed by government agencies such as the Federal Housing Administration or the Veterans Administration, depending on whether or not the borrower qualifies.
- Home Equity Loans allow you to borrow up to a percentage of the equity in your home to use as you wish.
- Credit-generating loans are supposed to help people with poor credit (or no credit) improve their loan the story. The lender places the loan amount in a savings account and the borrower makes fixed monthly payments for six months and two years. When the loan is repaid, the borrower gets back the money that was set aside. In some cases, you even get it with interest.
- Debt consolidation loans are personal lines that will help you pay off high-interest debt, such as credit card debt. They help you consolidate all your debts in one place, so you only make one payment each time you pay.
- Payday loans are usually bad news and should be avoided. You might get the money earlier than your usual payday, but tthese loans are short-term and have incredibly high fees. They must be repaid in full the next time you are paid, or you will have to renew the loan, which will incur new fees and charges. Avoid them as much as possible.
Important Loan Terminology
The following words refer to the types of loans listed above:
- Unsecured Loans do not require collateral, but generally have higher interest rates than secured ones, as they are riskier for the lending entity. Car and home loans are not unsecured, but many personal loans are. Secured loans are those that use some type of collateral.
- Installment loans (also called term loans) must be repaid in fixed installments over a specified period.
- Revolving credit allows you to borrow up to a certain amount. At the end of each billing cycle, you’ll pay off what you borrowed in full or roll it over to the next month’s balance with only a minimum payment.
- Fixed rate loans have an interest rate that will not change over the life of the loan, while variable rate loans have interests that may change.
Another sentence to know, by Forbes, is the “annual percentage rate” or APR. This is the total annual cost of taking out a loan, from the interest rate to other financial charges. Lenders must disclose the APR by law, so be sure to research it when considering a loan.
Finally, you may need to take out a loan with someone else. For example, IIf you and your partner qualify for a mortgage together, you will be co-borrowers or two people jointly responsible for repaying a loan. Lenders look at both borrowers’ credit and income to qualify, and you both end up owning the asset in question, like a house or car. If you’are the only person who gets the loan but you have bad credit or no credit, someone else with a better score can co-sign with you, which means that youthey will be responsible for loan repayments if you do not make them, and their credit is also at stake.