If you are like most people you have probably spent some time considering options on how to pay for college education, buy a house, a car or throw a huge wedding party. These are just a few examples of things that make us question: “Am I ever going to be able to afford this kind of thing?”
In an ideal world, you would be saving all the money you can until you have enough to pay for one or more of those things. But the world we live in is far from ideal, and for most of us, saving for a house can take a really, really long time.
So you are left with only a few options, of which taking out a loan can be the most convenient. This in and of itself has its own challenges, as you will have to learn about what type of loan best suits your needs. This task can feel overwhelming, so to help you with that we have put together a detailed list with 4 types of loans which will make it easier for you to make up your mind.
The 4 most popular loan types
This is the most broadly used type of loan because it can be used for almost anything. Want to take a trip? Planning a wedding? Need a home renovation? Personal loans got you covered. Different from bigger loans such as student loans, personal loans can be unsecured or secured.
Unsecured loans mean you do not need to back your loan with a sum of money (known as collateral). They are also known as “signature loans”, for all they require is your signature. But you know what they say: there is no such thing as a free lunch.
Unsecured loans require a better credit rating and they are also more costly because the lender must offset the risk somehow. The better your credit rating, the higher the chances of you having access to better interest rates on an unsecured loan.
Auto loans are secured loans. This means when you take this loan it is backed by collateral. Not your own collateral, though. Your vehicle is what actually secures the loan. In case you stop making payments, the vehicle can be repossessed by the lender.
Traditionally, these loans have terms that range from 36 to 72 months, however, rising car prices have pushed terms further and you may find longer loan terms. As in most loans, the better your credit score, the higher the chances of you being offered better interest rates.
In any case, shop around to find the best possible offers, and in case you get stuck with a loan that is taking a toll on your finances, refinancing your auto loan may be a good alternative to find lower monthly payments or even a better interest rate.
Ready to make a 10 to 30-year commitment? Because that is usually how long it takes to pay off this type of loan. Just like an auto loan, mortgage loans are backed by the asset in question (that is, your home). Having your car repossessed leaves you walking, but having your home repossessed leaves you homeless. So make sure you can afford the monthly payments.
On the other hand, the fact that this type of loan is secured makes it a cheaper type of loan. This means the interest you will be charged is lower than that of an unsecured loan. But just as in any type of loan, credit score matters, and it will affect how much interest you will have to pay.
There are even government bodies which back mortgages, such as the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), or the United States Department of Agriculture (USDA).
Student loans do not cover just any kind of education. You must be studying at accredited schools in order to apply for loans which will cover tuition fees and living expenses. You can take out student loans from federal or private lenders. Generally speaking, federal loans are the best option.
Some of the greatest advantages of federal loans are in the fact that they offer forgiveness, forbearance, deferment and options for repayment based on your income. The other great thing is that conditions are pretty much the same for any borrower. Private lenders, on the other hand, require credit checks and terms vary from lender to lender.
Things to consider when taking out a loan
Deciding on which lender and loan option you will pick can be a daunting task on its own, but if you keep the following things in mind, you should know exactly what to look for.
- Make sure you have a solid credit score and review your credit history. This will give you leverage when looking for better interest rates.
- Decide on how much you need to borrow and calculate your monthly payments to make sure you can cover the amount you borrowed, plus interest.
- Evaluate loan terms carefully so you don’t fall trap to fees you weren’t aware of.
The bottom line
Now that you are familiar with the different types of loans available, you are in a much better position to decide on which to choose. Do not forget to dig deep before deciding on your loan. There are too many good options out there for you to simply go with the first one you find. Here is a comparison between Rocket Loans and Light Stream Loans to give an idea on how to compare offers.
Remember banks are not in the business to make friends, so a nice fat loan does not come without its conditions. Do your research, be picky about your lender, and by no means mistake loans for free money. Regardless of how great of a credit score you may have, you will always be paying out more than you have actually borrowed. So choose wisely.