If you’re buying a home or pursuing higher education, you probably need a loan. THowever, there are many different types of loans here, and they can be confusing. Here are the big that You should know (and you should Read this business glossaryto).
The basics of a loan
A loan is money (or sometimes property or other tangible property) that a lender gives to a borrower on the understanding that the borrower will repay it with interest. Banks usually make loans to individuals or organizations.
Here are some of the main types of loans, per Experian Financial:
- Personal Loans are loans that can be used in principle anything the borrower wants, which sets them apart from auto or education loans. They can be used for emergencies, weddings, renovations, or other major expenses.
- car loans are designed to let you borrow the price of a car you want to buy, but they don’t cover a down payment. The vehicle itself serves as security and can be withdrawn in case you don’t pay regularly.
- student loans are used to fund undergraduate or college level education and may be granted by the federal government or private lenders. You usually want a federal one, as they offer deferral, income-based repayment options, and other benefits.
- mortgage loan cover the purchase price of a home, but like car loans, they don’t cover a down payment. Like car loans, they too come with collateral: your home can be foreclosed on if you don’t pay consistently. Some mortgages can be secured by government agencies like the Federal Housing Administration or the Veterans Administration, depending on whether the borrower qualifies.
- home loan allow you to borrow up to a percentage of your home’s equity to use as you wish.
- construction loans should help people with bad credit (or no credit) improve theirs Borrow story. The lender puts the loan amount into a savings account and the borrower makes fixed monthly payments for between six months and two years. When the loan is repaid, the borrower receives the money that was stored. In some cases you even get it with interest.
- Debt Consolidation Loan are personal lines that help you pay off high-interest debt, such as credit card debt. They help you consolidate all your debts in one place so that you only make one payment each time you pay it.
- payday loan is generally bad news and should be avoided. You might get the money earlier than your regular payday, but tthese loans are short-term and have incredibly high fees. They must be paid back in full by the next payout — or you may have to extend the loan and incur new fees and charges. Avoid them as much as possible.
Important credit-related terminology
The following words refer to the types of loans listed above:
- Unsecured Loans do not require collateral but typically have higher interest rates than secured ones because they pose a higher risk to the entity making the loan. Auto and home loans are not unsecured, but many personal loans are. Secured Loans are those who use some type of collateral.
- installment loans (also called term loans) must be repaid in fixed payments over a specified period of time.
- Revolving Credit allows you to borrow up to a certain amount. At the end of each billing cycle, you either pay back the amount borrowed in full or roll it over to the next month’s account balance by making only a minimum payment.
- Fixed rate loan have an interest rate that does not change during the life of the loan, while variable rate loans have an interest that may change.
Another phrase to know per Forbes, is “Annual Percentage Rate” or APR. This is the total annual cost of borrowing, from the interest rate to other financing costs. Lenders are required by law to disclose APRs, so keep that in mind when considering a loan.
Finally, you may need to borrow from someone else. For example meIf you and your partner jointly qualify for a mortgage loan, you are a co-borrower or two people who are jointly responsible for paying off a loan. Lenders check the credit and income of both borrowers to qualify you and in the end you both own the asset in question e.g a house or Car. If you’If you’re the only person receiving the loan, but you have poor credit or no credit at all, someone else with a better score can sign with you. which means that tYou are responsible for loan repayments if you fail to make them, and Your credit is also at stake.