types of bank loans

Understanding different types of bank loans

If you want or need to borrow money, your first step is to understand the different types of loans that are out there and what will work for your needs and circumstances. The guide can help you determine what loan type is best for your needs based on interest rates, loan amounts and loan terms.

Deciding what loan is right for your financial situation

Different loans are created for specific purposes. Deciding what type of loan is best for your specific needs, including the state of your credit reports.

To start loan shopping, reviewing the different types of loans, including both short-term loans and their long-term counterparts. Depending on your credit history and credit scores, different loans will fit your needs. Comparing loans will help you determine which loans you are likely to qualify for.

types of bank loans

Personal loans

Personal loans can be used for almost anything. They are one of the most versatile loan types – they can be used for anything from weddings to home improvement projects, credit card debt or even to pay off medical bills. Some lenders even offer personal loans in the form of small business loans if you are trying to start a company.

There are a few types of personal loans, unsecured and secured – one with collateral and one without.

Unsecured personal loans

Unsecured loans do not require collateral, such as a car or your home. Collateral is set to ensure you do not default on the loan. However, with unsecured loans, lenders will look into your credit history to determine if you are a good applicant.

Unsecured personal loans are good for major purchases or to consolidate your credit card debt. Often, personal loans offer a lower interest rate than your credit card’s APR. Using a personal loan to repay your credit card debt can save you money. But remember, like credit card debt, you must repay the loan.

Because your credit history is used to determine your ability to get an unsecured loan, these loans are best for those with high credit scores. If you have bad credit, you may still qualify for these loans, but the loan may come with high interest. Shopping around can help you determine who will give you the best interest rate.

Secured personal loans

Secured personal loans, like unsecured, can be used for almost anything. However, secured loans do require some sort of collateral to secure your loan.

These loans are best if you are looking for lower interest rates. The addition of collateral makes your loan less risky to lenders, as you have something “backing up” your loan. If you are confident you will not default on your loan, pledging collateral offers no risk to you.

However, if you do default on a secured loan, you may risk losing what you offered as collateral. As long as you pay the loan back on time, offering collateral is not a risk.

Payday loans

Payday loans are another option if you are looking for a short-term loan for emergency cash, especially if you have exhausted your other options. However, they often come with high fees in terms of interest rates and application fees. In addition, a payday loan must be paid back by your next payday – and they are not available in every state. 

Payday loans are best when you need a couple of hundred dollars fast; these loans are small and usually only offer loans up to $500. They can help if you are in a pinch, but have very high APRs – often over 400%. They should only be used in emergency situations.

Alternatives to payday loans

If you belong to a credit union, you may qualify for a payday alternative loan. They are designed to be more affordable than a traditional payday loan and often have much lower interest rates. In addition, if you are looking for a little bit more money, these loans can be taken out for up to $1,000.

Payday alternative loans also come with a much longer repayment period – anywhere from one month to six months. These loans also have lower fees than a typical payday loan. However, if you are not currently a member of a federal credit union, you may want to explore your other options.

Credit card cash advances

Most credit cards offer short-term loans that you borrow against your card’s balance known as a cash advance. Cash advances, like other short-term loan types, often have high interest rates and extra processing fees. Be sure to check out your credit card company’s policies when it comes to cash advances to determine if they are right for you.

Home equity loans

Home equity loans are a type of secured loan that uses your home as collateral to borrow a sum of money. Based on how much equity you have in your home, or what percentage of your home you own, the amount you can borrow will vary,

These loans are great if you are looking for alternatives for a personal loan, as they have lower interest rates than personal loans. Home equity loans are also versatile and can be used for almost anything. 

However, if you default on a home equity loan, you may force foreclosure on your home. Make sure you can afford to pay the loan back on time and budget to see how a home equity loan will fit into your finances.

Title loans

Title loans are taken out on your car, giving you money based on your car’s value. These loans are typically for amounts less than 50% of the value of your vehicle.

Car title loans need to be repaid quickly, often under a month – or else you may face losing your car. They also have very high-interest rates and should only be used for emergencies. Other options on this list may be better if you are in need of some extra cash.

Other common loan types

There are a few other common loan types that you may find. These loans are used only for very specific purposes. The following is a quick overview of other loan types you should be familiar with for larger purchases.

Student loans

Student loans are often some of the first loans people come across in their life. They are used to pay for education and other education-related costs – especially for those pursuing a baccalaureate or post-baccalaureate degree programs.

Loans for education can come from private lenders or from federal student loan programs. They usually take up to 10 years to pay off or longer, depending on how much you have taken out in student loans.

Mortgage loans

Mortgage loans are used to purchase a home and front the money for homeowners, who then pay it back over time. Mortgages are long-term loans that last anywhere from 10 to 30 years depending on your down payment. Once your mortgage is paid off, you will own your home in full and no longer have a monthly mortgage payment.

Auto loans

As the name suggests, auto loans are used to help pay for vehicles. When you borrow money to pay for your car, you are agreeing to pay off the loan over time – slowly making payments until you own the automobile. If you do not repay your lender, your car may be repossessed and you will be out of a vehicle and reliable transportation.

Auto loans can be taken out for pretty much any type of vehicle, but your loan terms and interest rates are largely determined by your credit report. Like most loans, the better your credit score and stronger your credit history, the better your loan terms will be.

Your next steps

Understanding your borrowing options will help you know what loan is best for your needs and for your budget. However, if you are consistently having financial issues and struggling to make ends meet, a loan may not be the answer. Instead, looking toward a credit counselor or building a budget will go a lot further than a loan will.

Check out other articles on our site to learn more about different lenders and get a better understanding on different types of loans.

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