When you need to take out a loan, it can seem like there are only two choices out there: personal loans or business loans. In reality, the world of lending is much wider than that and offers lots of different types of loans. In this article, we’re going to explore the 10 different types of loans you didn’t know existed and help you decide which kind would work best for your needs.
(1) Secured Loans
Secured loans are a type of loan that requires a borrower to put up some form of collateral in order to get the loan. This collateral can be your home or vehicle. The benefit is that if you don't pay off the loan, the bank has a right to take back your property and sell it to recoup the money they lent you. On the downside, these types of loans often have high interest rates because the lender assumes there's an increased risk for not being able to collect from borrowers.
Income-Based Loans: Income-based loans are a type of loan that adjusts monthly payments based on what income level someone is at. For example, people with lower incomes will have lower monthly payments while those with higher incomes will have higher monthly payments as their income rises due to interest rates adjusting accordingly.
(2) Unsecured Loans
Unsecured loans, also known as signature loans, are one of the most popular and easiest types to get. They don’t require collateral and are easy to qualify for. They work like a credit card in that you borrow money from your bank or credit union and agree to pay it back over time. The key difference is that you don’t need a good credit score or a large down payment to get one. Because there's little risk for the lender, these loans often have high interest rates. One major downside is that some banks can only issue these types of loans up to $25,000. If you're looking for more than that amount, then an unsecured loan might not be what you want.
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(3) Lines of Credit
Lines of Credit, or LOCs, are a type of installment loan that can be used to consolidate debt and pay off other loans. A LOC is offered by a bank and offers you the ability to borrow money for any reason at any time. The interest rate for this type of loan will be higher than other loans because it is unsecured. It also has a high closing cost.
Income-Based Repayment: If you have federal student loans, Income-Based Repayment is an option that allows borrowers to repay their debt as a percentage of their income over the course of 25 years. They base the borrower's monthly payment on 15% or less of their discretionary income.
(4) Term Loans
Term loans are the most popular type of loan, and they are often used for big purchases such as buying a car or a home. Term loans typically have a fixed interest rate and a fixed monthly payment, which means you know how much you'll need to pay each month when you sign on the dotted line. When your term loan is paid off in full, it's usually due in one lump sum at the end of your term. Interest-Only Loans: Interest-only loans allow you to make minimum payments without paying down any principal. These types of loans can be risky because if you don’t pay down any principal, then the balance owed will only grow larger over time. There may be exceptions depending on how long the loan lasts and if there is any kind of pre-payment penalty involved with your loan agreement.
(5) Construction Loans
Construction loans are typically used to fund the construction of a property. They are usually repaid once the property is sold or refinanced. Non-Owner Occupied Loans: Non-owner occupied loans are for properties that will not be lived in by the borrower and instead rented out. These loans typically have higher interest rates as they have more risk than owner-occupied properties. For example, if you are buying an investment property, you can use a non-owner occupied loan to buy it with low down payment requirements (since you won't live there).
(6) Commercial Real Estate Loans
Commercial real estate loans are a type of financing that can be used to purchase commercial property or make improvements to an existing property. They're also sometimes used for business expansion. -Construction Loans: Construction loans can be used to fund the construction of new buildings, bridges, highways and more.
-Hard Money Loans: Hard money loans are short term, high interest loans that are backed by the equity in the borrower's home or land so they don't need collateral or credit checks.
-Line of Credit: A line of credit is like a credit card, but instead it draws funds from your bank account as needed up to your preapproved limit.
(7) Mortgage Loans
Mortgage loans allow you to borrow against the equity in your home for a loan. In other words, this type of loan is based on the value of your home minus what you owe on it. The interest rates are usually lower than credit card rates and personal loans because the lender knows that if they go bankrupt, they can sell their house to get their money back. Some people need mortgage loans in order to buy houses, but others choose to use them as second mortgages when buying an investment property or refinancing an existing home loan.
Mortgage loans typically have fixed rates and terms over 20 years, so it’s wise to shop around for different offers before choosing one.
(8) Auto Loans
An auto loan is a type of loan that allows you to purchase a car by borrowing money from the lender. To get an auto loan, you typically need to provide proof of employment or income, have a good credit score, and be at least 18 years old. The amount borrowed for an auto loan usually ranges between $1,000-$25,000.
Auto loans are also sometimes called car loans or vehicle loans.
(9) Student Loans
There are a lot of different types of student loans out there, and it can be hard to know which one you qualify for. But don’t worry-we’ve got you covered. Here’s a rundown of the main types of student loans: - Federal Direct Student Loans are funded by the federal government. If you have this type of loan, your interest rate will depend on your credit history. - Stafford Loans are subsidized by the federal government and offer fixed interest rates over 6 or 7 years depending on when they were disbursed. These loans also come with interest rate reduction benefits if paid as agreed, deferment opportunities during school breaks or leaves of absence, and forgiveness programs in certain cases like public service work.
(10) Personal Loans
Personal loans, also called signature loans, allow you to borrow up to $35,000 as long as you are employed and have a good credit score. The personal loan has a fixed interest rate and is usually repaid over five years. Rates start at around 9% APR with monthly payments that range from $150 to $1,500 depending on the size of the loan. Be aware that when you sign for this type of loan, it can be difficult or impossible to get out of debt before your term expires.
Start-up Loans: Start-up loans provide small businesses with much-needed working capital in order to get their business off the ground.