Ironically, and surprisingly, the major reason why Americans borrow money is to get out of debt.
There are many types of loans, and consumers take them for various reasons. It could be personal to purchase a home for education, debt consolidation, and general expenses. The thing is, not all loans are created equal, and if you’re looking to borrow money, it’s wise to decide the right type of loan that will suit your needs.
As you compare different types of loans, it’s imperative for you to understand that your credit score will be an important factor. It not only determines the type of loan you get, but whether you get an approval, the interest rates, and the loan terms.
To help you get started, we bring you a comprehensive guide on the different types of loans and help you make an informed decision.
Personal Loans
Personal loans are by far the most versatile types of loans, and you can get one for almost any reason.
Personal loans are the fastest-growing consumer debt product, and they have a staggering outstanding debt of over $115 billion. An average of 20 million consumers in America have personal loans, and the majority take them out to consolidate debt and refinance credit cards.
There are two types of personal loans, which are secured and unsecured.
You need collateral to get a secured personal loan, but you don’t when getting an unsecured loan. Collateral means putting up an asset, like your home or your car against the loans in case you fail to pay up.
The thing is, most personal loans don’t require collateral, especially if you have a good credit score, but you have to be wary of the interest rates.
The higher your credit score, the better the loan terms you’ll get. You can get personal loans for various reasons, like paying medical bills, debt consolidation, and other personal emergencies, but not for things like a college education.
Quick Loans
Quick loans are the type of loans that you get almost instantly and are most suitable for emergency situations.
Quick loans are subject to less vigorous approval processes and can be extended to borrowers with bad credit scores. They are quite similar to personal loans, but you also need to be wary of the high-interest rates.
Payday Loans
Essentially, payday loans are short term loans that are due the next payday after getting the loan. This is the best emergency type of loan you can get because you can get one almost immediately.
You’ll need to write a post-dated check for your next payday and authorize the lender to cash the check and the interest rates automatically. Payday loans usually have some steep fees and rates, though, so you need to be careful about the amount you get.
Title Loans
If you own a car and need some money, you may be able to get a title loan.
Essentially, you can borrow as much as 50% of your car’s value, and you may have to pay the loan within 15 to 30 days. Failure to this means that you could lower your car as the lender will repossess it.
This makes it a risky type of loan, and it’s advisable to exhaust other loan options before you finally agree to a title loan.
Typically, title loans come with a high ARP in triple digits, and once you get approved, you’ll have to give the lender your car title until you’re able to settle the debt. This is the kind of loan you get for emergencies, and you should be wary of car repossession.
Pawn Shop Loans
Pawnshop loans are also emergency loans and kind of a last option when there’s nothing else you can get. These are quite easy to get because all you need is a valuable item, like jewelry or electronics.
When you take the item to a pawn shop, you’ll get money based on its value. Loan terms will vary, and so will interest rates, but you’ll not get your item back until you settle the full loan.
Student Loans
A record $1.6 trillion! That’s the student loan crisis we’re currently facing with over 45 million borrowers in the US. It’s the second-largest consumer debt after mortgage debt.
Student loans are meant for education or education-related costs, including food, textbooks, housing, etcetera. These loans are strictly for those purposes and can’t be taken out for anything else.
Home Equity Loans
Home equity loans are secured types of loans where the home is used as collateral.
You can borrow quite a large sum of money against your home, but the amount will be based on your home’s equity. It could also be based on the difference between the home’s market value and the amount of money you still owe.
Essentially, you can’t borrow more than 85% of your home’s equity. This type of loan can be an alternative to a personal loan, and you can use the money for a variety of reasons, such as settling medical bills or making home renovations.
Before you take out a home equity loan, you should ensure you have a sure way to make payments because you stand to lose your home.
Credit Builder Loans
Have you ever heard of credit builder loans? These types of loans are for people who don’t necessarily need the loan money but need to establish a good credit history by making timely payments.
When you take out a credit builder loan, the lender will deposit the money into your account, and you’ll make partial payments together with the stipulated interest rates for a given period.
The lender will report your payments to the credit bureaus, which will slowly build your credit score. The thing is, you’ll only get the lump sum of money after paying off the loan, and not before.
Credit Card Cash Advances
Credit card cash advances are short-term loans that you can borrow against your credit card balance. These types of loans are suitable when you need instant cash, but you need to be wary of the high-interest rates you’ll have to pay.
Getting the Right Types of Loans
Now that you know all the different types of loans available, you can make a choice about what you need. It’s vital for you to set a budget on what you can afford to pay back.
If you constantly find yourself needing a loan, you may need to reassess your expenses, and if you currently need a quick loan, kindly get in touch with us, and we’ll hook you up.
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