13 Types of Loans you should know
Not all loans are the same. If you need money, you must first determine which sort of loan is appropriate for your needs.
When you start comparing loans, you’ll notice that your credit score plays a big role. It aids in the determination of your loan approval and terms, including interest rate.
Borrowed funds can be used for a variety of purposes, including launching a new business, purchasing an asset, and property maintenance and upgrades.
We’ll go through 13 types of Loans you should know about and their benefits to get you started. We’ll also go over some factors to keep in mind as you make your decision.
What is a Loan?
A loan is a sum of money that one or more individuals or companies borrow from banks or other financial institutions so as to financially manage planned or unplanned events. In doing so, the borrower incurs a debt, which he has to pay back with interest and within a given period of time.
Before any money crosses hands, the beneficiary and the lender must agree on the terms of the loan. In some situations, the lender will compel the borrower to put up an asset as collateral, as specified in the loan agreement. A mortgage is a popular type of loan taken out by American households to finance the purchase of a home.
Individuals, corporations, and governments can all receive loans. The main purpose of taking one out is to obtain money in order to increase one’s overall money supply. For the lender, interest and fees are sources of income.
13 types of Loans you should know
Loans can be classified further into secured and unsecured, open-end and closed-end, and conventional types.
1. Personal Loans
A personal loan is a sum of money that you can borrow for various purposes. A personal loan could be used to consolidate debt, pay for home upgrades, or organize a dream wedding, . Banks, credit unions, and online lenders all offer personal loans. You must repay the money you borrow over time, usually with interest. Personal loans may be subject to fees from some lenders.
It is simply described, it is mostly an unsecured loan taken out by individuals to suit their own needs from a bank or a non-banking financial corporation (NBFC). It is based on important factors including income, credit and job history, repayment capacity, and so on.
This is an expensive way to get money, because the loan is unsecured, which means that the borrower doesn’t put up collateral that can be seized in case of default, as with a car loan or home mortgage. Typically, a personal loan can be obtained for a few hundred to a few thousand dollars, with repayment periods of two to five years.
Borrowers need some form of income verification and proof of assets worth at least as much as the amount being borrowed. The application is typically only a page or two in length, and the approval or denial is generally issued within a few days. Read more about personal loans here
2. Credit Cards
A credit card is a small rectangular piece of plastic or metal provided by a bank or financial services business that enables cardholders to borrow funds to pay for products and services at merchants that accept credit cards. Credit cards require cardholders to repay the borrowed funds, plus any applicable interest, as well as any additional agreed-upon charges, in full or over time by the billing date. Credit cards typically charge a higher annual percentage rate (APR) versus other forms of consumer loans.
When a customer pays with a credit card, he or she is effectively taking out a tiny personal debt. No interest is levied if the debt is paid in full right away. If you don’t pay off some of your debt, you’ll be charged interest every month until you do.
3. Home-Equity Loans
A home equity loan is a sort of consumer debt that is also known as an equity loan, a home equity installment loan, or a second mortgage. Home equity loans allow homeowners to borrow money against their home’s value. The in an home equity loan, loan amount is determined by the difference between the current market value of the home and the homeowner’s outstanding mortgage balance.
Homeowners might borrow against the equity they have built up in their homes. That is, they can borrow up to the value of their property. They can borrow half of the house’s value if half of the mortgage is paid off, or they can borrow 50% of the property’s value if the house has improved in value by 50%. In simple terms, the amount that can be borrowed is the difference between the home’s current fair market value and the amount still outstanding on the mortgage.
4. Home-Equity Lines of Credit (HELOCs)
Home equity lines of credit are very similar to home equity loans with a bit difference. Just like Home equity loans, Home equity lines of credit allow homeowners to borrow money against their home’s value. but unlike home equity loans, they are a revolving source of funds, much like a credit card, that you can access as you choose.
Most banks offer a number of different ways to access those funds, whether it’s through an online transfer, writing a check, or using a credit card connected to your account. Unlike home equity loans, they tend to have few (if any) closing costs, and they usually feature variable interest rates—though some lenders offer fixed rates for a certain number of years. TOP HOUSING LOANS PROVIDERS IN NIGERIA
5. Small Business Loans
A small business loan gives you access to capital so you can invest it into your business. The funds can be used for many different purposes including working capital or improvements including renovations, technology and staffing, business acquisitions, real estate purchases, and more. Personal Loans: How to payoff Personal Loans fast in 2022
6. Conventional Mortgage or Loan
A conventional loan is one that is not insured or guaranteed by the federal government. Instead, the loan is guaranteed by private lenders, and the borrower is often responsible for the insurance.
Conventional loans accounted for 76 percent of all new home purchases in the second quarter of 2021, making them by far the most popular home financing option.
Conventional loans provide more flexibility to buyers, but they are also riskier because they are not insured by the government.
You’ll generally need a credit score of at least 620 to qualify for a conventional loan, though a score that’s above 740 will help you get the best rate.
7. Payday loans
Payday loans are short-term, high-cost loans that are typically due by your next payday. States regulate payday lenders differently, which means your available loan amount, loan fees and the time you have to repay may vary based on where you live. And some states ban payday lending altogether.
To repay the loan, you’ll typically need to write a post-dated check or authorize the lender to automatically withdraw the amount you borrowed, plus any interest or fees, from your bank account.
They are also called cash advance loans or check advance loans. Payday loans are usually meant to be paid off in one lump-sum payment when you get your paycheck. Because of this, the interest rate on these loans is fixed.
8. Title Loans
A title loan is a type of loan that involves the use of a valuable asset as security. There are two main reasons why title loans are so popular. For starters, an applicant’s credit score is not taken into account when establishing loan eligibility. Second, because of the lenient application standards, a title loan can be issued fast for sums as low as $100. The most common type of title loan is a car title loan, where the car itself is the asset put up as collateral.
9. Pawn shop Loans
Because there is no credit check or application process, a pawn loan can be a rapid way to obtain money. The value of the object you pawn determines the amount of your loan.
For example, if you own a name-brand guitar, you can take it to a pawn store and have it valued by a pawn broker. The pawnbroker may give you a loan up to the appraised worth of the guitar once its value has been determined.
Pawnshop loans come with a variety of terms, including exorbitant interest rates. As a result, some states have enacted legislation to control the industry.
10. Debt Consolidation Loans
A consolidation loan is meant to simplify your finances by combining multiple bills for credit cards, into a single debt, repaid with one monthly payment. This means fewer payments each month and lower interest rates.
Consolidation loans are just another name for unsecured personal loans.
A debt consolidation loan is a type of personal loan that can help you combine several high-interest debts into one new loan, ideally one with a lower interest rate. You pay off multiple debts with a single loan that has a fixed monthly payment. When managed responsibly, a debt consolidation loan can help you save money on interest and get out of debt faster.
11. Auto Loans
Auto loans are secured loans that help borrowers pay for a new or used car. They are available from dealerships and a variety of lenders, so it’s important to shop around to find the best interest rates and terms for your vehicle. Car Loans Explained – How to Get a Car Loan in Nigeria
12. Student Loans
Student loans are loans taken by students to pay for educational expenses. Rapidly rising college tuition costs have made student debt the only option to pay for college for many students.
Student loan is often generated when a student takes out loans to finance the portion of their tuition that is not covered by their own assets, grants, parent or guardian loans, or scholarships.
13. Balloon Mortgage Loans
A balloon mortgage is a real estate loan that has an initial period of low or no monthly payments, at the end of which the borrower is required to pay off the full balance in a lump sum. The monthly payments, if any, may be interest only, and the interest rate offered is often relatively low.
Balloon mortgages have short-term advantages but can be risky for homeowners and lenders alike.