Types of Loans

When life presents big changes, such as getting a new home, purchasing a new car, opening a new business or going to school, it can be tricky to know how you are going to pay for them.

For the particularly expensive items in your life, you may not have the resources to pay for them right away. Luckily, there are ways to borrow money responsibly so that you do not have to miss out on what you want to do.

Perhaps the most common way for Americans to borrow money is by taking out a loan from a bank or another money-lending institution. Loans have many different terms and sizes, but they all basically work in the same way: You can get a fixed amount of money up front, as long as you agree to pay it back either all at once or over a longer period of time under a payment plan. Once you have learned about these types of loans, you can make an informed decision about which kind is right for you.

Personal Loans

The first and perhaps most basic type of loan is the personal loan. These are often considered to be the loans with the most flexibility, as they can be used on anything from small house renovations to emergency medical debts. As opposed to a credit card, which has a long-term commitment, you can use a personal loan to only finance a single project or debt, as long as you pay it off in your allotted time frame. However, personal loans can be more difficult to qualify for than a credit card because of their inherent risks on behalf of the lender.

One of the biggest personal loan perks for borrowers is that they are unsecured, which means they do not require you to put up personal property as collateral for access to the loan. This does not mean that they make borrowers immune to paying off their debts, but it does provide more security to their assets.

Personal loans also have set amounts that you can borrow, depending on who you are borrowing from, your financial information and your credit score. Your lender sets the duration of your personal loan and establishes when you are required to make payments on it. Generally, if you can qualify for them, personal loans can be the most rewarding for those who need a financial boost for a variety of purposes.

Business Loans

If you are looking to finance your new business or to simply raise capital, you might wish to look at the large number of business loans that exist.

Business loans are financed by banks and other money lenders to let small business owners borrow large sums of money for their businesses and repay those debts slowly over an extended period of time.

There are many different types of business loans, but the two most common types are term loans and Small Business Administration (SBA) loans. They provide different amounts, interest rates and repayment terms, but instead of being based solely on your personal credit score, these factors are mostly based on your business credit.

Business loans can be used for many different business costs. These include but are not limited to:

  • Increasing overall business cash flow and capital.
  • Buying work-specific equipment (as opposed to renting).
  • Buying real estate for your company’s use.
  • Getting money for unpaid customer invoices before your customers actually pay.
  • Receiving a cash advance for immediate business use.

Not all of these business loan options are the right choices for everyone. Options such as receiving cash advances can have high borrowing costs and interest rates. However, all business loans have varying figures based on the lender, your business credit and overall level of proven credibility.

Auto Loans

You might need an auto loan from your car dealer in order to slowly pay off the high cost of a new or used automobile. Auto loans work in very similar ways to other loans in that you borrow a sum of money and pay it off with interest over time. However, the three biggest factors in determining an auto loan are the amount you need to borrow, the interest rate and the length of time you have to pay off your loan. This makes auto loans more variable than other types of loans, such as federal student loans.

Your annual percentage rate (APR) will generally be low, and you will also usually get ample time to pay off your loan. However, it is important to have an idea of how quickly you would like to pay off your auto loan so that you are not ambushed by salesman tactics. While it may be tempting to pay small amounts over a longer period of time, this can result in your interest adding up quickly and will require you to pay much more than you might without so much interest. Paying higher than your monthly requirements can be difficult, but it is recommended for auto loans so that you can fully own your vehicle much sooner.

Student Loans

One of the biggest costs that many young and older adults in America tackle each year is the cost of higher education. College and university tuition is expensive, and student loans have become more popular for students attempting to pay for their varied schooling costs. Student loans in America come from federal and private organizations, which work with grant and scholarship providers to ensure that college and university students can pay their tuition.

Different loan providers can give individuals different loan amounts. Usually, however, the amount that you are required to pay after receiving your loans is based on your monthly income. There is interest in the form of annual percentage rates (APRs) involved in student loans, which also varies depending on the amount of financial aid that you need.

Payday Loans

Finally, it is important to consider other types of loans that may not be quite as common or preferred.

One such loan, which exists to help people who need to borrow money quickly, is the payday loan. These types of loans are much riskier and come with more aggressive terms than other loans, as they often involve putting up collateral in the form of a portion of your next paycheck.

You can get a payday loan by visiting eligible storefront lending agencies in person or by finding them online. While these loans are often for small amounts, they can still be risky, as they have some of the highest interest rates of any loan. Due to the inherent risks in taking these loans, they are heavily regulated in most states and banned in others.

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