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What are the 4 types of loans

what are the 4 types of loans

A loan can be for a specific, one-time amount, or it may be availed as an open-ended line of credit up to a specific limit.1 There are different loan options to consider when making a significant purchase or taking care of an expense. There are traditional loans, personal installment loans, bad credit loans, and many more. The best loan depends on your desired loan amount and repayment preferences. 

When considering your loan options, you may ask, “What are the 4 types of loans?” Learning about your financing options before applying to borrow money is essential.

The 4 Types of Loans

While there are different types of loans you can apply for, they all fall into the four basic categories below. If you need to borrow money, keep in mind that your credit score will affect your loan offers. 

Individuals with bad credit scores may have a more challenging time qualifying and getting low-interest rates. Many lenders are wary of potential borrowers with risky financial behavior on their credit reports. However, there are ways for consumers to obtain a $2000 loan with bad credit

Loan TypeCollateral RequiredInterest Rate BehaviorRisk LevelCredit Score ImpactSuitable For
Unsecured LoansNoVariesModerateHigh ImpactGeneral purpose loans, no assets
Secured LoansYesVariesHighModerate ImpactLarge purchases, bad credit
Fixed-Rate LoansVariesFixedLowModerate ImpactBudgeting, long-term financing
Variable-Rate LoansVariesVariableModerate to HighModerate ImpactShort-term loans, risk-takers

Unsecured Loans

An unsecured loan is any loan that does not require collateral. When you apply for funding with unsecured installment loans, you do not have to risk losing any personal property. Most loan options are unsecured, so many options are available.

If you have a bad credit history, getting approval for an unsecured loan may be difficult. Consumers without excellent credit may be surprised by the interest rate and the low loan offer amount. Lenders use high rates to offset the risk of lending money to bad credit borrowers. 

Suppose you need a large lump sum to pay off your credit card balance or medical bills. In that case, you may have difficulty getting a sizable loan amount without a high credit score. 

Secured Loans

Secured loans require borrowers to pledge some form of personal property. Certain types of loans require specific assets, such as real estate or a vehicle. However, consumers could secure funding using cash in a savings or certificate of deposit (CD) account, stocks, future paychecks, jewelry, etc.

If you desperately need a loan for bad credit, a secured loan can be a beneficial option. An asset can help borrowers obtain more money, lower interest rates, and longer repayment terms. However, a secured loan is risky because borrowers could lose possession of their assets if they default on the loan. 

Fixed-Rate Loans

A fixed interest rate does not change throughout the repayment process. If borrowers choose to take out a fixed-rate loan, they pay the same amount every month. Fixed-rate loans are a great financing option for people who want a consistent payment plan that makes budgeting easy. Most loan options have fixed interest rates, so you can easily apply for loans with unchanging monthly payments. 

Variable Rate Loans

A loan with a variable interest rate will have a fluctuating monthly payment. The amount borrowers pay each month depends on the principal balance and the market interest rate. Budgeting is harder to do with a variable interest rate since interest rates can be low or high. Variable interest rates are a gamble. Although getting a low monthly payment with variable rates is possible, you have to risk potentially paying a high amount.  

How Credit Scores Affect Your Loan Choices

Credit scores directly affect borrowing. To better understand how lenders look at credit scores, read about the 5 credit score ranges below. 

Credit Score RangePerksRisks
300 – 579: Poor– Easier to get approved for secured credit cards
– Opportunity for credit builder loans
– High interest rates
– Limited credit options
– Likely need a co-signer for loans
580 – 669: Fair– Eligible for some unsecured credit cards
– Qualify for some loans with higher interest rates
– Higher interest rates
– May require a co-signer
– Limited loan options
670 – 739: Good– Lower interest rates
– Higher credit limits
– More loan options
– Some premium credit cards may be out of reach
– Rates may vary
740 – 799: Very Good– Competitive interest rates
– Eligibility for premium credit cards
– Easier loan approval
– May miss out on the best possible rates
– Lenders may still consider other financial factors
800 – 850: Excellent– Best possible interest rates
– High credit limits
– Easier approval for all types of loans
– Risk of overborrowing due to easy credit access
– Maintaining the score requires vigilance

As you can see, a higher credit score can help you get the best loan terms, while a low FICO score can limit your options. 

If you have a bad credit score, you may worry about your ability to get a loan at all. Rest assured that many lenders offer bad credit loans that have flexible approval requirements. However, it’s critical to understand how much the loan will cost. 

Consider how much money you need, how much you want to pay monthly, and how much time you wish for repayment. Your answers can help you decide on a loan option that saves you money and stress. 

Loan Options You Should Know About

Now that you know about the four basic types of loans, you can choose the best loan option for your current financial situation. The best loan offers enough money, affordable rates, and reasonable repayment periods. Before applying with a lender, compare offers and ensure you understand the terms and conditions.

Personal Loans

A personal loan is a form of installment financing that borrowers can use for almost any expense, such as equipment financing or home repairs. Personal loan borrowers receive a lump sum, which is repaid monthly for a specific period. Personal loans are generally unsecured, meaning you don’t have to put in any collateral to acquire them.2 However, there are secured personal loans available. 

Qualification for an unsecured personal loan depends on your credit score and recurring income. The credit requirements are generally flexible with personal loans. For example, poor credit personal installment loans provide quick cash, even for bad credit scores.

Payday Loans

Payday loans are short-term loans that provide fast money to consumers with low credit. Lenders base eligibility almost entirely on a person’s income. If you have low credit, you could quickly get a small amount of money through a payday loan. Many payday lenders require potential borrowers to apply in person, but there are no fax payday loans online. 

Financial experts often try to dissuade people from applying for payday loans as they are high-cost loans. Borrowers end up paying a lot for a small lump sum due to excessive interest rates. And unlike more traditional loans, borrowers must repay payday loans in full within two weeks. Payday loans are temporarily convenient but end up being a financial burden to borrowers.   

Auto Loans

Auto loans help consumers purchase new and used vehicles. Suppose you are looking to invest in a reliable mode of transportation. In that case, you may get an auto loan online or at the dealership. An auto loan can provide a large deposit quickly, and borrowers can pay off the borrowed amount over several months or years. Eligibility depends on your credit score and your income. Getting an auto loan with a low FICO score is possible, but it will cost you. 

Student Loans

Student loans are for undergraduates and postgraduates interested in furthering their education. Borrowers can use their unsecured loan money for tuition, room and board, books, supplies, etc. There are two types of student loans: federal and private. 

The US Department of Education funds federal student loans and creditors fund private student loans. Federal student loan eligibility is based on several criteria, including household income, citizenship, enrollment, and academic grades. Private student loans could provide more money than federal loans, but eligibility depends on credit scores and monthly earnings. 

Mortgage Loans

Most people interested in buying a home will apply for mortgage loans. Consumers can get mortgage loans from creditors or government agencies such as the Federal Housing Administration (FHA) and Veterans Administration (VA). 

A mortgage loan covers the cost of real estate except for the down payment. The building secures funding from a mortgage loan, so the creditor can seize the property if the loan defaults. Homeowners typically pay off the loan over fifteen or thirty years, although alternative repayment lengths exist. 

Credit Builder Loans 

A credit builder loan can help consumers get the money they need and improve their credit scores. The payment history for a credit builder loan gets reported to a credit bureau, which can boost your credit if you continuously make on-time payments. Almost anyone can qualify since good credit is not necessary. However, you will have to show proof of income. 

Lenders transfer the loan amount to a savings account, and the borrower pays fixed monthly payments for a set period. Payments are typically spread out over six to twenty-four months. Once a borrower repays the credit builder loan, the lender releases the money into the savings account.

Home Equity Loans

A home equity loan is an installment loan similar to a personal loan. Home equity loans allow homeowners to borrow against the equity in their home. The financial institution provides a lump sum upfront that can be used for various financial emergencies, such as medical bills, car repairs, etc. 

Eligibility for a home equity loan depends on the borrower’s creditworthiness, income, and real estate property. The approval process for a home equity loan is quite long, which means you may have to wait several weeks or months to get loan funds. And since the property is used as collateral, you risk losing your home if you default.  

Consolidation Loans

Debt consolidation loans are installment loans that provide enough funding to consolidate debts, such as personal loans. Consolidating debt could help borrowers save money on interest and stay on top of their due dates. 

But remember that debt consolidation loans are only beneficial when you can get better loan terms than you currently have. Some lenders offer 0% introductory rates, but those rates skyrocket after the promotional period ends. It’s critical to know the standard APR before applying for this type of loan.

Frequently Asked Questions About the 4 Types of Loans

How do personal loans differ from other types of loans?

Personal loans are generally unsecured installment loans that you can use for almost any purpose, from debt consolidation to home improvements. They offer flexibility but often come with higher interest rates compared to secured loans like home equity loans.

How do interest rates vary among the different types of loans?

Interest rates can vary widely. Secured installment loans like home equity loans often have lower rates, while unsecured loans like personal loans may have higher rates. Fixed-rate loans lock in your interest rate, while variable-rate loans can fluctuate over time.

Can I use credit builder loans to improve my credit score?

Yes, credit builder loans are designed to help you build or improve your credit score. They work by depositing the loan amount into a savings account, and as you make payments, your payment history is reported to credit bureaus.

Is debt consolidation easier with certain types of loans?

Debt consolidation is often easier with personal loans or home equity loans. Personal loans are quicker to obtain but may have higher interest rates. Home equity loans offer lower rates but put your home at risk if you default.

How do monthly payments work for fixed-rate and variable-rate loans?

For fixed-rate loans, your monthly payments remain the same throughout the loan term, making budgeting easier. For variable-rate loans, your monthly payments can change based on market interest rates, making budgeting more challenging.

What factors affect my eligibility for different types of loans?

Your credit score, income, debt-to-income ratio, and the value of any collateral you’re offering are key factors. For specific loan types like home equity loans, the amount of equity you have in your home also matters.

A Word From CreditNinja on the 4 Types of Loans 

CreditNinja wants you to understand the four basic types of loans: unsecured, secured, fixed-rate, and variable-rate. Knowing the different types of loans available can help you find the right one for your situation. 

If you want a personal loan with competitive interest rates and flexible repayment terms, consider applying with CreditNinja! You could apply for a personal loan online and get your money the same day if you’re eligible!*   

*Applications approved before 10:30 a.m. CT Monday-Friday are generally funded the same business day. Applications approved after this time are generally funded the next business day. Some applications may require additional verification, in which case the loan, if approved, will be funded the business day after such additional verification is completed.

References:

  1. What is ‘Loan’ │ The Economic Times
  2. 4 Types of Loans You Should Know │ The Reporter
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