There are several types of loans, and you will need to know more about them before taking the loan. Some people think they can skip this part and just take out a loan without following some basic steps. This is not a good idea as it might land you more trouble than you had imagined.
Many people don’t know that there are different types of loans, each designed for another purpose. So, if you want to know about the different types of loans, keep reading as we will discuss five very common yet different loan types you must know.
5 Different Types of Loans
Different types of loans have additional requirements and conditions. There are many loan types, but it is essential to know that every loan differs from the others as it has its terms, interest rates and repayment amounts.
1. Personal Loans
Most online and offline banks provide personal loans, and their money can be used for almost anything, from paying bills to purchasing a new 4K Smart 3D TV.
The loan is unsecured—unlike a vehicle loan or a mortgage—the borrower does not put up collateral that can be confiscated in the event of default—it is an expensive way to obtain funds.
A personal loan can typically be arranged for between 100 and 1000 dollars with two and five-year payback terms.
2. Credit Cards
Every time a consumer uses a credit card to make a purchase, it is practically the same as taking out a modest personal loan. No interest will be applied if the balance is settled in full right away. Every month interest will be added to the debt if any portion is not paid in full.
3. Home Equity Loans
Homeowners who have built up equity in their properties can borrow against it. In other words, they are only limited by what they own. They may borrow 50% of the home’s value if the mortgage is paid off in full or 100% if the house’s value has improved by 50%.
The amount that can be borrowed, in essence, is the sum of the current fair market value of the home and the outstanding mortgage balance.
4. Home Equity Lines of Credit (HELOCs)
A home serves as collateral for the home equity line of credit (HELOC), which functions similarly to a credit card. The amount of credit offered to the borrower has a maximum. A HELOC may be used, repaid, and reused for as long as the account is open, usually 10 to 20 years.
The interest may be tax deductible, just like a standard home equity loan. However, the interest rate is not determined when the loan is accepted, unlike a typical home equity loan.
5. Small Business Loan Type
Most banks and the Small Business Administration offer small business loans (SBA). People starting new firms or growing existing ones frequently seek these out.
Only when the business owner has submitted a formal business plan for evaluation are such loans approved. The loan agreement typically includes a personal guarantee, which means that the business owner’s personal assets are used as security in the event of loan repayment default. These loans often have terms of five to 25 years. Sometimes interest rates are negotiated.