Types of Loans

Loan types vary because each loan has a specific intended use. They can vary by length of time, by how interest rates are calculated, by when payments are due and a number of other variables.

Debt Consolidation Loans

A consolidation loan is meant to simplify your finances. Simply put, a consolidation loan pays off all or several of your outstanding debts, particularly credit card debt. It means fewer monthly payments and lower interest rates. Consolidation loans are typically in the form of second mortgages or personal loans.

Student Loans

Student loans are offered to college students and their families to help cover the cost of higher education.

Mortgages

Mortgages are loans distributed by banks to allow consumers to buy homes they can’t pay for upfront. A mortgage is tied to your home, meaning you risk foreclosure if you fall behind on payments.

Auto Loans

Like mortgages, auto loans are tied to your property. They can help you afford a vehicle, but you risk losing the car if you miss payments. This type of loan may be distributed by a bank or by the car dealership directly but you should understand that while loans from the dealership may be more convenient, they often carry higher interest rates and ultimately cost more overall.

Personal Loans

Personal loans can be used for any personal expenses and don’t have a designated purpose. This makes them an attractive option for people with outstanding debts, such as credit card debt, who want to reduce their interest rates by transferring balances. Like other loans, personal loan terms depend on your credit history.

Small Business Loans

Small business loans are granted to entrepreneurs and aspiring entrepreneurs to help them start or expand a business.

Borrowing from Retirement & Life Insurance

Those with retirement funds or life insurance plans may be eligible to borrow from their accounts. This option has the benefit that you are borrowing from yourself, making repayment much easier and less stressful.

Borrowing from Friends and Family

Borrowing money from friends and relatives is an informal type of loan. This isn’t always a good option, as it may strain a relationship. To protect both parties, it’s a good idea to sign a basic promissory note.

Whenever you decide to borrow money – whether it is to pay the bills or buy a luxury item – make sure you understand the agreement fully. Know what type of loan you’re receiving and whether it is tied to any of your belongings.

Also, familiarize yourself with your repayment terms, what your monthly obligation will be, how long you have to repay the loan and the consequences of missing a payment. If any part of the agreement is unclear to you, don’t hesitate.