Types of Loans

Finding the right loan can be confusing. You know you need money, but it is difficult to know where to start.

 

There are many different types of loans available, and the places you are most likely to learn about them are the same places where you want to negotiate a good deal for yourself: banks. If you are wondering how to get a good deal, or which sort of loan will best suit your needs, you will want to do some research for yourself. Below you will find information regarding the seven most popular types of loans.

Personal Loans

Personal loans are a great option for individuals who need a quick source of cash. They are commonly used for major expenses, like starting a business or paying for a wedding, but they can also be used to help consolidate your credit.

The main problem you need to be aware of with these loans is their fees. An origination fee costing anywhere up to two percent is generally considered fair, as it covers the costs associated with organizing the loan. Be wary of other tricks lenders may use to increase their profit margin, though. Loan insurance, for instance, may be useful, but there are often loopholes that make them less useful. It is against the law for lenders to try and pressure you into buying this insurance.

Student Loans

College can be essential to ensuring an individual’s financial future. At the same time, it has become more expensive than ever before. If you need a student loan, there are several types of options you should be aware of. It is important to understand that a student loan is different from a scholarship or grant. While all three options provide you with the resources to pay for your college education, obtaining a student loan requires that you repay it at some point.

There are different types of student loans available, including government loans and private loans. Additionally, there are different loans available for undergraduate students and graduate students, as well as work-study opportunities. Work-study programs employ you to do work that is relevant to your field in exchange for covering a certain portion of your tuition.

Before taking out a student loan, make sure you are only borrowing what you need. Though a loan may seem like easy money now, it may take years to pay off.

Auto Loans

The average new truck or car costs $33,560. This is an expensive purchase for most Americans, which means you should understand car financing before you begin shopping. Pay careful attention to the relationship between your down payment, your interest rate, and the amount of time you have to pay off the loan.

The best action to take is finding car financing before you go shopping. This way, you are not negotiating the cost of your new car and the terms of your financing at the same time. This also helps you keep your budget in mind. Since financing can take place over 60 months, it may seem like you can get any car you want. However, a bigger down payment can help you get better terms for your deal, as well as making it more likely you will get accepted.

The biggest downside of these loans is the length of time that is required to pay them off, as well as the consequences if you begin missing payments.

Payday Loans

Payday loans are one of the most dangerous and controversial loans on this list. Their average interest rate is 400%, meaning you would pay the cost of the loan several times over if you took a full year to pay it off. This sort of lending is often accused of being predatory.

However, if you are smart about your financial situation, payday loans can be a useful resource when faced with a financial emergency. A single bad ticket or surprise hospital visit could mean you do not have enough money to pay your bills. When compared to the cost of overdraft and late fees, a payday loan may be worth it. The key is to make sure you do not get caught in a cycle of debt, continually borrowing to pay off your previous payday loan.

Business Loans

Between starting your business, growing your business, or simply looking to cover some regular business expenses, there are many situations where you could find yourself needing a business loan. If you are starting your business, a personal loan or small business loan are your best choices, since banks do not regularly make loans to startup businesses. Instead, they want to see that a business has the cash flow required to make loan payments.

 

If you have been in business for at least a year, you will want to understand both your personal credit score and business credit score before applying for a loan, as both will be used to determine your creditworthiness, and thus your interest rate. Business credit scores are more complicated than a personal credit score because they are not standardized. More than anything else, the key to having a good business credit score is to avoid overextending your finances and making all of your loan payments on time.

Peer-to-Peer Loans

The main appeal of peer-to-peer lending is simple: because these transactions take place online, they operate with significantly less overhead than a bank and they can occur in a matter of days. This means lenders and borrowers can both expect more favorable interest rates, and they can do so without lengthy wait times or face-to-face meetings.

The main problem with peer-to-peer loans for lenders is that they lack security. Many peer-to-peer borrowers have a higher credit risk, which in turn means a lender has to be willing to accept the danger that some of their loans could default.

Lending Among Friends and Family

Looking for loans from a friend or relative can grant an individual access to funds when they have no other options. However, there is serious risk involved with these loans for both the borrower and the lender, such as the possibility of ruining a relationship. The best way of avoiding this problem is to make the terms of the loan clear from the beginning. Writing and signing a contract at the beginning can help avoid confusion later, and if both parties are comfortable, charging interest can allow the lender to get a fair return on their investment.

If a friend or relative asks you to loan them money, you do not have to say yes. If you are worried about enabling them, your best bet may be to help them create a budget or see a therapist. If you do decide to give them a loan, make sure you are not loaning more than you can afford to lose: you do not have the money-collecting resources of a bank at your disposal, which means your loved one defaulting on the loan can leave you having to write the loan off as a loss.

 

 

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