Loans

A quick and simple guide to the different types of loan

by Sheila Attebury

You need a loan. But, with so many choices, it is overwhelming as an average consumer to determine what type of loan is right for you. To help you get started, here is a list of some of the most common loans available.

Keep in mind that many of these loans can be obtained on-line, as well as with your local bank or credit union offices.

Student Loan

A student loan is one of the first types of debt incurred as a young adult. Federal student loans are available for full time college students and/or their parents.

The Federal government has set maximum student loan interest rates to keep education affordable. Student loans usually do not require credit checks or collateral.

Student Loans are typically deferred during the time that the student is attending school and for 6 months after graduation, or until the student falls below half time enrollment. Then the loan begins to amortize (repayment of principal and interest) for a specified time frame, usually 10 years.

Auto Loan

Auto loans are used to purchase new or used vehicles. The lender maintains a lien on the vehicle until it is paid in full.

Auto loans can be obtained from car dealerships or bank /credit union lenders. Terms typically include a payback time of up to 60 months. Interest rates can vary from approximately 6.0% to 14%, with a better credit rating qualifying for the lowest rates.

Recreational Vehicle Loan

Buying an RV is considered a luxury purchase. As such, lenders typically look for a good credit rating and sufficient income to qualify for RV financing.

RV loan rates are similar to auto loan rates. Repayment terms usually range from 10-15 years, but for larger loans (say, $10,000 or more) the loan term may extend to 20 years.

Mortgage

Home mortgages are used to purchase residential real estate. The house is used as collateral.

Rates and terms vary depending on the current real estate market, amount of down payment and the credit rating of the borrower.

Home Equity Loan

Home equity loans are used for a specific purpose, such as home improvement. Home equity loans usually have a fixed rate and are amortized over a specific number of years.

The lender maintains a second position lien on your home until the loan is paid in full. Most banks will lend up to 80% of the value of your home, less your current mortgage balance. For example, to calculate how much you may be able to borrower on a home valued at $600,000.00:

Value of home: $600,000.00

Multiply by 80%: $480,000.00

Subtract current mortgage balance: $300,000.00

Amount you can borrow: $180,000.00

Home Equity Line of Credit

A home equity line of credit is similar to the home equity loan, except that the home equity line of credit can be used for any purpose and typically has a variable interest rate. This type of loan can substitute for most other types of consumer loans. Many borrowers use home equity lines of credit to pay for college tuition, purchase an auto or RV, and to finance small business needs. Repayment can be interest only with principal due at maturity.

Signature Loans and Lines of Credit

A signature loan or line of credit is a loan that requires no collateral. Credit is given based on the repayment ability and credit rating of the borrower.

Payday Loan

A payday loan is a short-term loan intended to provide cash needed before you receive your next pay-check. Payday loans typically range from $100 to $500 and are usually due within a two-week period. These types of loans are very expensive to the borrower. Lenders can charge interest rates up to about 30% of the balance for the two-week period, which would translate to an APR (annual percentage rate) of over 700%. Some payday lenders charge a flat fee. For example $15.00 per $100.00 borrowed.

If you are unable to pay back the loan plus fees and/or interest at the end of the short-term loan period, the lender may allow the borrower to renew the loan for another two-week period, with additional fees and interest, of course.

Regulation and legislation differs from state to state, so you should check into laws regarding payday loans in your state.

Bad Credit Loan

Bad credit loans are basically the same as other personal loans except that the rates and terms are not as favorable as those that are granted to borrowers with better credit ratings.

Small Business Loan

Small business loans are available to individuals through lenders that partner with the Small Business Administration, a government agency that guaranties a portion of the loan amount. This is an incentive for banks to make loans to small businesses, which typically have a higher risk of default.

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