Loans 101: The Different Types of Loans
- September 20, 2019
- By: Greenpath Financial Wellness
“Who wants to give me money?”
There are many different types of loans. Depending on what you need, the amount, your credit score or qualification for a loan, and other factors, you might choose different types of loans. Each specific loan will have different costs and requirements.
Here are some of the different types of loans that are available if you need to borrow money, and considerations for each:
These loans are offered by most lending institutions and can be used for almost any purpose. Typically, they are unsecured and range from a few hundred dollars to a few thousand dollars. You can apply with your bank or credit union, and will usually need to show proof of income. You can be approved or denied within a few days, or maybe even a few minutes or hours.
Personal Loan Considerations
Interest rates on personal loans can be on the high side. According to the Federal Reserve, the average interest rate on a personal loan is about 10-12%. A personal loan would probably be best if you only want to borrow a small amount and have the ability to pay it back within a few years.
You may not realize it, but when you use a credit card you are taking out a loan. You can complete a credit card application online, and will be approved or denied within minutes. The amount of credit extended to you depends on your creditworthiness, which is determined largely by your credit score. A line of credit could range between $300 and $10,000.
Credit Card Considerations
The great thing about a credit card is that they are accepted pretty much anywhere. The downside to a credit card is that the interest rates can be very high, especially if you’ve missed a payment. And having a revolving credit account can make it easier to spend more than you had planned.
Payday loans are short-term cash loans based on your personal check. You write a personal check for the amount borrowed, plus the finance charges, and immediately receive cash. The lender holds the check for about two weeks, and then the loan and finance charges are paid in one lump sum.
Payday Loan Considerations
Payday loans are easy to get, but borrowers should avoid this type of loan at all costs. Payday loans have high-interest rates; in fact, payday lenders typically charge 400% annual interest or more! Taking out a payday loan can also be a hard cycle to break, and lead to service charges or additional loans. More than 80 percent of payday loans are followed by another loan within 14 days, creating a vicious cycle of high-interest debt.
Home Equity Loan
If you own a home, a home equity loan allows you to borrow against the equity you have in your home. Equity is the difference between the value of your home and the amount you still owe. The loan can be used for many different reasons, but typically this loan is used for home improvements.
Home Equity Loan Considerations
The interest rates on a home equity loan are typically pretty low. But the term is usually fairly long, ranging from 10-20 years. The interest is usually tax-deductible. The major downside to a home equity loan is that you could possibly lose your home if you default.
How to Find the Best Loan for Your Situation
- Do your research on the specifics of the loan you are considering.
- Plan the loan into your budget to see what it means for you every month.
- Make an informed decision about whether you want the purchase enough to justify the added monthly cost of a loan payment with interest.
If you need to borrow money, just make sure to do your homework, understand the agreement fully, familiarize yourself with the repayment terms and pick the option that works best for you.
Jeremy Lark is dedicated to combating financial strife and stress through financial wellness, education, and technology. Through his work as Senior Manager of Client Services, he has helped GreenPath’s clients find the tools and resources they need to turn their lives around. Jeremy has been with GreenPath for 12 years, and while a born-and-bred Yooper, currently resides in the Detroit area.