A loan is money borrowed that is expected to be paid back, typically with interest. Not all loans are created equal. In fact, there are over a dozen types of consumer loans you may use to finance your next big purchase, cover an unexpected expense or fund your future goals. These loans vary in terms of everything from repayment periods to loan amounts. They also vary in terms of how they work — such as whether you get the money as a lump sum or as a revolving line of credit — as well as their purpose.
Lending requirements also differ between loan types. Larger loans with longer repayment terms typically require higher credit scores. However, smaller loans with shorter repayment periods often cater to people with no or bad credit.
If you need financial assistance, it is important to understand the various loan products on the market. How you intend to use the loan will influence the type of loan for which you apply. Below are several common loan types that you may need to cover various expenses.
Student Loan
Student loans help to pay for education-related expenses, including books, housing, food, transportation and tuition. Student loans can come from either the federal government or private lenders. The repayment timelines for student loans are often flexible, as the federal government offers a variety of income driven repayment plans based on borrowers’ ability to repay.
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Personal Loan
Of all the loan categories, a personal loan is the broadest. Of all the types of loans, it also has the broadest terms. The terms on personal loans are broad and depend on how much you wish to borrow and your credit history. Whether or not you need to back the loan with collateral depends on if the loan is secured or unsecured.
Secured Personal Loan
Though rare, secured personal loans typically come with better terms, as the risk is minimal when the lender has collateral to cover the borrowed money. Because lenders assume less risk, you can likely score better interest rates and more lenient terms with a secured personal loan.
Unsecured Personal Loan
Unsecured personal loans are riskier for lenders, as the lack of collateral means there is no guaranteed path to financial recovery if you fail to repay the loan. Because of this, the terms on an unsecured personal loan are typically stricter than those of secured loans.
Credit Cards
Credit cards are essentially revolving lines of credit. The issuer extends you a certain amount, which you borrow against whenever you need to make a purchase. As you spend, your amount of available credit decreases. However, when you repay what you borrowed, your amount of available credit goes back up.
Credit cards do not come with repayment periods. Rather, you make a minimum monthly payment each month to remain in good standing. The interest rates on credit cards vary considerably and are largely dependent on your credit score.
Auto Loan
An auto loan is a type of funding that you can use to pay for a vehicle over an extended period, typically between two and seven years but can be as much as ten years. Most auto loans are secured, usually by the vehicle itself. What this means is that if you fail to make your payments, the lender can repossess the vehicle to get its money back.
The terms and rates on an auto loan vary and depend largely on your credit score, the purchase price of the vehicle and whether the vehicle is new or used. Car dealerships are major issuers of auto loans. However, you may be able to score better terms from your bank, an online lender or a credit union.
Credit Builder Loan
A credit builder loan is an innovative product that allows consumers to build a savings and their credit at the same time. With this loan, you would pay a financial institution of your choice a pre-determined amount for a period of between six to 24 months. You would also pay a percentage of interest on the amount. For each payment you make, the bank reports to the credit bureaus, thereby helping you establish a positive credit history. At the end of the payment term, the bank releases the funds to you (sans any fees and interest kept) for you to do as you wish.
Debt Consolidation Loan
A debt consolidation loan is a single loan you can use to tackle most or all your other debt. By using one larger loan to pay off outstanding balances, you may be able to reduce the amount you owe in interest as you streamline your payments into one.
Some lenders will only issue a debt consolidation loan if you allow them to pay down your debt on your behalf. They do this by sending approved funds directly to your creditors rather than to your bank account. Others may deposit half the amount of the loan into a bank account of your choice and use the remaining amount to pay down your balances for you.
Home Loan
A home loan lets you purchase a home without having to put forth the full asking price. Like an auto loan, a mortgage is secured by the home itself. If you fail to repay your loan, the bank can foreclose on your home. This risk remains until you repay your loan in full.
Home loan terms vary, from 15 to 30 years. To obtain a home loan, most lenders require you to have a score of at least 620. However, a score of 580 may qualify you for a government-backed loan.
Many home loans are issued by private organizations, such as banks, online lenders and credit unions. However, government entities issue home loans as well. Common government-backed mortgages include the FHA loan and VA home loan.
Small Business Loans
Small business loans are designed to help entrepreneurs grow their businesses. There are several types of small business loans, including the Small Business Administration loan, equipment loans, term loans and working capital loans. In most cases, your business must employ 300 people or less to qualify for a small business loan.
