Loans

What Are the 4 Types of Loans?

There are different loan options to consider when making a significant purchase or taking care of an expense. 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 a bad credit score may have a more challenging time qualifying and getting low-interest rates. Many lenders are wary about potential borrowers with risky financial behavior on their credit reports. However, there are ways for consumers to obtain the money they need quickly despite poor credit. 

Unsecured Loans

An unsecured loan is any loan that does not require collateral. When you apply for funding with unsecured 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 that 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.  

6 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. Borrowers receive a lump sum which is repaid monthly for a specific period. Unsecured personal loans are most common, but there are secured personal loans. 

Qualification for an unsecured personal loan depends on your credit score and 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

A payday loan is a short-term loan that provides 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 installment 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 score. 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 in the savings account.

Key Takeaways

You must understand your loan options if you need a loan to finance a major purchase. There are different loans, but you should know about the four basic types: unsecured, secured, fixed-rate, and variable-rate. 

Financial literacy can help you pick the best loan for your current budget. 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. 

Your credit score may limit your options if your score is lower. Keep an eye on your credit to determine how lenders perceive your application. The three major credit bureaus provide one free credit report annually, so take advantage. 

References:
What Can Be Used as Collateral for a Personal Loan?
8 Different Types of Loans You Should Know