Understanding the loan process isn’t simple and can be overwhelming without the right financial resources. There are also a bunch of different types of loans with varying requirements and purposes.
How do you know which one is right for you?
To give you more clarity, here is a breakdown of 5 common types of loans and their different purposes.
- Personal Loans
Personal loans are widespread because they are the broadest type of loan. They’re used for emergencies, weddings, vacations, medical treatment, and home renovations. The repayment terms for personal loans are usually anywhere from 24-84 months.
You can request a secure or unsecured personal loan. A secure loan requires some collateral for the lender if you can’t pay back the loan.
An unsecured loan is usually more expensive but doesn’t need any collateral, only your signature.
- Student Loans
Student loans help pay for a college education at an accredited university. The loan can help pay for tuition and living expenses. In recent years, 69% of students took out some type of student loan.
There are two different types. Federal student loans are paid through the Free Application for Federal Student Aid (otherwise known as FAFSA). Private student loans come with lower interest rates and fewer protections but are recommended for students with good credit.
- Home Equity Loans
Home equity loans are used when you have equity in your home. Your home’s equity provides collateral for the borrower if you aren’t able to pay back the loan. The value of your loan is based on the value of your home and/or property.
If you subtract your mortgage balance from your home’s accessed value, you can get an estimate of your home’s value.
- Auto Loans
An auto loan helps you buy a car with a typical 3-7 year payment period. If you’re getting a loan for a car, the collateral is the vehicle. If you don’t pay back your loan, the lender will take away the car.
There are different types of loans available for cars, so be sure to do your research to find what’s right for you.
- Debt Consolidation Loans
If you’re looking to streamline the process of paying off multiple loans, consider taking out a debt consolidation loan. This can help you consolidate all your loan payments into one monthly payment.
It’s beneficial for individuals who have high-interest loans or credit card debts. Applying for a debt consolidation loan could make you eligible for lower monthly payments and rates.
Be sure to speak to your financial advisor or a trusted expert to know if this loan is right for you.
Now You Know Different Types of Loans and When to Apply for Them
Though this list isn’t exhaustive, these are 5 common types of loans. At some point, most Americans will take out at least one of these loans.
Having loans aren’t anything to stress about, but you must understand the important characteristics of the loan and the parameters.
If you ever have any questions specific to your loan, it’s recommended that you reach out to a financial advisor for help. They can give you a step-by-step tutorial.
And if you found this article helpful, be sure to check out the rest of our blog. We cover a ton of topics related to personal finances that you’ll enjoy!