Before buying a significant purchase, it’s usually a good idea to save money. However, in practice, it’s not always feasible. This is especially true for larger-ticket items like a home or car payment, college tuition, or even unforeseen medical expenses.
You have the option to borrow money if you are unable to save money up front. It’s important for you to know what kind of loan to look for though, as particular purchases require different kinds of loans.
Here are 16 different loan kinds that can assist you in making life’s essential purchases:
Individual loan
The most common kind of loans are personal loans, which normally have durations ranging from 24 to 84 months for repayment. With the exception of illicit activity and college education, they can be used for almost anything. Personal loans are frequently used for the following purposes: .
- Holidays
- Nuptials & Emergency
- Medical care
- Renovations to homes
- Consolidation of debt
- Moving to a different city
- Computers or other expensive devices
There are two main types of personal loans: secured and unsecured. Collateral, such a car or savings account, is used as security for secured loans, which the lender may seize if you fail to pay back the entire loan balance.
However, unsecured loans don’t need any collateral because they are solely secured by your signature; this is why they go by the other term, signature loans. Because the lender is taking on greater risk, unsecured loans are typically more expensive and require stronger credit.
Applying online for a personal loan from a bank, credit union, or internet lender is usually simple and quick. The greatest personal loans, which have affordable interest rates and a variety of repayment options, are available to borrowers with good credit.
Car loan
One sort of secured loan that you might use to purchase a car is an auto loan, which has three to seven-year payback durations. Here, the car itself serves as security for the loan. The lender will take the automobile back if you don’t make the payment.
Generally speaking, banks, credit unions, online lenders, and even auto dealerships offer auto loans. In their financing department, several vehicle dealerships assist you in locating the best loan from affiliated lenders. Some function as “buy-here-pay-here” lenders, granting you the loan through the dealership. But these are usually far more costly.
Students loan
At approved schools, student loans are intended to cover living expenses in addition to tuition and fees. This implies that paying for particular kinds of education, such coding boot camps or unofficial classes, is typically not possible with student loans.
Federal and private student loans are the two varieties available. By completing the Free Application for Federal Student Aid (FAFSA) and corresponding with the financial aid office at your school, you can apply for federal student loans. Federal student loans have marginally higher interest rates but often offer greater advantages and protections. Although private student loans have far less advantages and protections, you may be able to get better rates if your credit is strong.
Mortgages loan
Mortgages come in a variety of forms and assist you in financing the purchase of a home. Banks and credit unions are typical mortgage lenders; but, if the loan qualifies, they might sell it to a federally supported organization like Freddie Mac or Fannie Mae.
Additionally, some categories of individuals can apply for government-backed lending schemes, such as:
- Loans from USDA for low-income rural homebuyers.
- FHA loans are available to those with modest to low incomes.
- VA loans available to veterans and active-duty military personnel.
Home Equity Loans
A home equity loan, sometimes referred to as a second mortgage, may be an option for you if you have equity in your house. The loan is secured by the equity in your house, or the part of it that you own rather than the bank. Up to 85% of the equity in your house may normally be borrowed; the loan amount is disbursed in one lump sum and repaid over a period of five to thirty years.
Simply deduct your mortgage balance from your home’s assessed value to determine the equity in your house. For instance, your equity is $100,000 if your house is worth $250,000 but you owe $150,000 on your mortgage. Taking into account the 85% loan limit guideline, you might be able to borrow up to $85,000 with $100,000 in equity, depending on your lender.
Loans for Credit Building
Small, short-term loans taken out specifically to help you establish credit are known as credit-builder loans. Unlike traditional loans, they are intended for those with bad or no credit, so you don’t need good credit to be eligible. Credit unions, community banks, lending circles, Community Development Financial Institutions (CDFIs), and online lenders are common places to find credit-builder loans.
As with a conventional loan, you don’t get the money upfront; instead, you make set monthly installments and get it back at the end of the loan term. The usual credit-builder loan amount is from $300 to $3,000, with annual percentage rates (APRs) ranging from 6% to 16%.
Particularly for young individuals, credit-builder loans can be an incredibly inexpensive and secure way to begin establishing credit. For example, if you set up auto-pay for your payments, you can completely automate the process of building credit and never have to worry about missing one.
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Loans for Debt Consolidation
By qualifying for a new loan to pay off your existing obligations, debt consolidation enables you to simplify your payments and have only one monthly loan payment to make. A debt consolidation loan can benefit you in two ways if you have high-interest debts, such as credit card debt or high-interest personal loans. Initially, you might be able to receive a smaller monthly payment. Second, you might be eligible for reduced rates, which could ultimately result in financial savings.
To secure a debt consolidation loan that lowers your payments, you must first compare interest rates offered by different lenders and credit card companies. Additionally, if your credit has improved since obtaining your present credit card or loan, your chances of qualifying are increased. Depending on whether you qualify, your lender might settle your debts automatically or you might have to do it yourself.
Short-Term Loans
One kind of short-term loan is a payday loan, which typically lasts until your next paycheck. You don’t need strong credit to be eligible for these loans because they aren’t based on credit. But for a few reasons, these loans frequently have a predatory quality to them.
First of all, they impose extremely high finance costs, which in certain circumstances equal up to 400% annual percentage rate (note that a finance fee is not the same as an APR). If you can’t pay off your loan by the time you get paid again, you can choose to roll it over. At first, it seems beneficial, but then you find that additional costs are added on, trapping many people in debt commitments that sometimes exceed the amount they first borrowed.
Loans for Small Businesses
Small Business Administration (SBA) loans, term loans, working capital loans, and equipment loans are among the several kinds of small business loans available. Small firms, usually those employing up to 300 people, can use these loans to finance their operations. Local companies, including hair salons, restaurants, family-run grocery stores, and landscapers, as well as single proprietorships, including freelancers who maintain a regular day job, are eligible to apply.
Generally speaking, small business loans have stricter qualifying standards than personal loans—especially if you’re asking for an SBA loan. The benefits, however, are priceless because these loans can provide your company with the capital it requires to expand. Small business loans are the greatest option for business funding because alternative techniques like invoice factoring or merchant cash advances may be more expensive.
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Title Loans
Another kind of secured loan is a title loan, in which you use the title of a vehicle you own—like a car, truck, or recreational vehicle—as security. Depending on the lender’s assessment, your loan limit can be anywhere from 25% to 50% of the value of your vehicle. Title loan providers also impose a monthly charge equal to 25% of the loan balance, or a minimum 300% annual percentage rate (APR), making title loans an expensive financing alternative.
These loans differ from conventional vehicle or recreational vehicle loans for several reasons:
- They have extremely high prices.
- As security for the loan, you turn over the title to the lender.
- These are quick loans, usually lasting no more than 30 days.
As a result, title loans and payday loans are similar in that they are high-cost, short-term, small-dollar loans that are frequently regarded as predatory.
Loans from Pawnshops
Another loan option that we typically discourage is pawnshop loans due to its high costs, low loan limits, and immediate repayment requirements. You must bring something valuable to the pawnbroker in order to obtain a loan from a pawnshop, such as a power tool, jewelry, or musical instrument.
After evaluating the item, the pawnbroker will usually give you a loan that ranges from 25% to 60% of the item’s resale value. A pawn ticket will be issued to you; you must bring it back when it’s time to pay back the loan, which is usually within 30 days. The pawnbroker keeps your goods to sell and make money if you don’t come back or if you misplace your ticket.
Boat Financing
Boat loans are offered by banks, credit unions, and internet lenders and are specifically made to fund the purchase of a boat. Both secured and unsecured loans are available; secured loans need the collateralization of your yacht. As with any loan pertaining to a vehicle, it’s important to consider depreciation.
Over time, boats and other vehicles lose value, particularly when you purchase a new boat. It is feasible to owe more on a long-term loan than you can sell your boat for if you opt for this option, don’t make a sizable down payment, and/or sell your boat quickly after purchasing it. This implies that you won’t be in a desirable situation if you have to continue making loan payments after selling the yacht.
Loans for Recreational Vehicles (RVs)
RV loans can be secured or unsecured. While larger, more luxurious RVs are secured loans that use the RV as collateral and function more like auto loans, smaller RV loans are usually unsecured and operate similarly to personal loans.
RV loans range from about $25,000 that you return over a few years to up to $300,000 that you reimburse over 20 years, depending on the lender.
RVs are entertaining and a great way to spend quality time with your family. However, depreciation should be taken into consideration, particularly if you’re purchasing a new RV and intend to sell it eventually.
Loans to Family
Informal loans from family members (and occasionally friends) are referred to as family loans. If, for whatever reason, you are unable to obtain a conventional loan from a bank or lender, you may decide to turn to your family.
Family loans are advantageous because credit is not a requirement for obtaining one. Your family member may decide to lend you the money if they trust you and have the resources to do so.
However, that does not mean you should profit from your relative’s kindness. Creating and signing a loan agreement that outlines interest payments, deadlines, late fees, and other penalties for non-payment is still a smart idea. To assist you with this, you can access payment calculators and draft agreements online.
Mortgages for Land
There are numerous motives behind land purchases. Perhaps they intend to develop it into a home, use its natural resources, or rent it out to individuals and companies. However, land can be costly; in this situation, a land loan may be helpful.
There are two main types of land loans: developed and unimproved. Plots that are ready for construction are eligible for improved land loans. For instance, they may already have power lines, a driveway, and an established well and septic tank. Conversely, unimproved land loans are for an undeveloped parcel of land that may or may not be easily accessible.
Because land loans are riskier for lenders than other types of property loans, you should anticipate higher interest rates, stricter credit criteria, and down payments if you decide to apply for one.
Loans for pools
If you want to add a pool to your home, you probably won’t be able to do so without taking out a loan—unless you’re buying an inflatable kiddie pool. Depending on how elaborate you want to get, pools can cost anywhere from $3,000 to $100,000 or more, according to Fixr.
Similar to loans for boats, RVs, and other lifestyle items, it’s a good idea to think about your home’s potential market worth if you decide to add a pool. If you intend to sell your property in the future, you may be reducing the pool of potential buyers. Not everyone wants to possess a pool.