Understanding the main types of loans.
When you are searching to find the best type of loan for you, it can get a bit confusing, can’t it? This is because there are just so many options out there for you. There is also so much jargon that they just do not teach us in school, and while a majority of loans are really simple, the search for your perfect loan can be like trying to find a needle in a haystack.
Today, we will talk to you about the different types of loans so that you can narrow down your options and have a better understanding of what loan type is the best choice for you.
First of all, we will inform you of all the types of loans you can get.
- Personal loans- Secured.
- Personal loans- Unsecured
- Payday loans.
- Home equity loans.
- Credit card.
- Credit card cash advances.
- Payday alternative loans.
- Title loans.
- Pawn shop loans.
Each type of loan is best for a different thing. We will not look at all of these today, instead, we are going to focus on the most commonly used loan types and tell you more about these. If you need more information on all of these loans, take a look at the loans by CreditNinja.com.
A quick overview of loan jargon.
There is some jargon within the loan world, and most of us will know these after having dealt with large purchases or loans. Yet, if you are new to this aspect of life, it is very likely you do not know these. We certainly think this should be taught in schools, however, since it is not, we will help you out with understanding this jargon.
APR. APR stands for Annual percentage rate, which is the total annual cost of a loan, including all the fees.
FCA. FCA stands for ‘The Financial Conduct Authority, which regulates consumer credit lending.
Loan Term. The loan term is the length of time for which you are borrowing. Often this will be shown in months. If a loan is to be paid over three years it will be down to 36 months for example.
Equity. If you are a homeowner, then the equity is the amount that your home would be worth after subtracting the mortgage. Let’s say your mortgage is $120,000, and it is worth $170,000, then you will have $50,000 equity. Just some basic math.
Now that we understand the jargon, let’s have a look at the most popular types of loans you can get.
A personal loan is probably the most popular loan type of choice. These are loans made to you as an individual and can be secured or unsecured. They generally require you to repay the original amount that you borrowed as well as interest over a fixed period of time. You will often need to have a decent credit score for a personal loan, especially if it is unsecured.
Next we will talk about the difference between secured and unsecured loans, as this will be of importance for you, not just in big loans, but in personal loans that you may use for vacations or affording college.
The difference between secured and unsecured loans.
Secured and unsecured loans are different. A secured loan is a loan where the lender has taken a security (collateral) often in the claim of a residential property such as a house or flat, in some instances it may be a vehicle too. This is a common trait for large loans such as mortgages, however, you can get secured personal loans as well.
In the event that you take out a secured loan and fail to repay the loan in time, the bank, or your lender, may be able to take control of your home and sell it in order to recover their losses.
Secured loans are viewed as a bad option for most borrowers as no one wants to lose their home to the bank, so it is usually better to opt for an unsecured loan, in spite of how unsecured loans will typically have higher interest rates than secured loans.
Credit cards are a very common type of loan. Whenever you pay with a credit card it is like taking out a very tiny personal loan. If you pay off the balance immediately then you suffer no interest charge. However, if some debt remains, interest will be charged each month until paid off.
Credit card cash advances are also a thing offered by most credit cards. Anyone who has a credit card has a revolving line of cash available at any ATM. It is a very expensive way to borrow money. Depending on your credit, it can get an interest rate as high as 36%. These will also usually come with a fee, usually around 3%
Small business loans.
Small Business Loans are available to most through banks, and these are a type of loan that you will often find sought out by start up businesses or expanding businesses. These loans are granted only after the owner of the business has submitted a formal business plan for review. The terms of a loan like such usually include personal guarantee, meaning that the owner’s assets will serve as collateral. Loans such as these are usually extended for periods of 5-25 years, and interest rates are often negotiable.
Home equity loans.
Home equity loans are a type for people who own their own homes. Meaning, they can borrow the amount they actually own. So if half of the mortgage is paid off then they can borrow half the value of the house, or if the house has increased in value by 50% then they can borrow this amount. These loans have low-interest rates, however the house is used as collateral for the loan, and you could lose the house in the case of default on the loan.
You can also get HELOC’s, which works like a credit card but uses your home as collateral.