Loans – an effective way to help individuals financially – come in various types. Each type has its own set of benefits, drawbacks, risks, and limitations.
No matter your financial goals, if you’re planning to secure a loan but are unsure which to choose, first be aware of the major loan types.
Below are five essential loan types designed to align perfectly with your financial goals. Let’s review them to choose the right one!
1. Student Loans
To help individuals finance their education, student loans are a powerful tool. These loans can cover various financial needs, such as:
- fees,
- books, and
- living expenses.
Being a student, securing this loan can help you stay focused on studies without immediate financial pressure. This type of loan usually comes in two forms, federal and private. Each has unique terms and interest rates.
When it comes to repayment, it often begins after graduation. This provides a grace period for graduates to secure stable employment.
2. SBA Loans
Government-backed, the Small Business Administration (SBA) loans are aimed at supporting small businesses. SBA loans provide favorable terms, such as lower interest rates and extended repayment periods. Both of them make this type of loan an attractive option for entrepreneurs.
SBA loans can be an invaluable tool for a variety of business purposes, including:
- purchasing equipment,
- expanding operations, or
- obtaining working capital.
The application process for securing this loan may be complex. However, once obtained, financial support will enhance the business’s growth potential.
3. Mortgages
Known as long-term loans, mortgages are used to purchase real estate. If you secure a mortgage, you can buy a home without having to pay the total purchase price up front. Mortgages come in various forms, which include fixed-rate and adjustable-rate options. They typically require a down payment.
Be mindful that a property itself serves as collateral. It means if you fail to repay the loan, this could result in foreclosure. People looking to achieve homeownership and build equity over time can benefit from mortgages.
4. Secured & Unsecured Loans
Secured loans require collateral, whether it’s a car or a savings account. This reduces the lender’s risk and frequently results in lower interest rates.
On the contrary, unsecured loans don’t need collateral. They depend solely on the borrower’s creditworthiness. These loans may carry higher interest rates. However, they offer borrowers the advantage of not putting their assets at risk.
Remember, both types of loans serve different purposes. Whether it’s personal expenses, debt consolidation, or unexpected emergencies, you (as a borrower) can meet them without any financial stress.
5. Auto Loans
Auto loans finance the purchase of vehicles. They can cover the full price of the car or a significant portion of it. That’s what makes ownership accessible for many.
Most lenders offer competitive interest rates. You can secure an auto loan using the vehicle itself as collateral, which can lead to better terms.
As a borrower, you can choose from different durations, which will affect your monthly payments and the overall cost of financing. Obtaining an auto loan can offer reliable transportation, whether for commuting to work or managing daily responsibilities.