7 Common Types Of Loans, From Most To Least Popular
by Abdul Aziz Mondal Loans & Credit 09 May 2023
During your lifetime, you are exceedingly likely to need some kind of loan. Loans allow you to acquire money quickly to make important investments — in vehicles, homes, education, and business — or survive the expenses of life. Many people have a fear of taking on any kind of debt, but the truth is that loans can be a safe and savvy method of accruing wealth, as long as you understand the different types of loans and how to use them properly.
Here Are Details About 7 Common Types Of Loans
Because cars have become such an essential component in modern life that auto loans have become some of the most popular loans in the U.S. Few automobile consumers can afford to purchase a new car with cash, so they utilize auto loans to secure wheels and make monthly payments on their vehicles until the loan is repaid — or until they sell their car and acquire a new auto loan. Most auto loans have repayment terms between two and seven years, and APRs for these loans fall within about 2.65 and 14 percent. The vehicle purchased acts as collateral for the loan, so it will be seized if you fail to make your payments.
In the U.S., the cost of higher education has grown exponentially in the past few decades, to the extent that more and more students rely on student loans to obtain degrees that qualify them for basic employment. Most student loans are held by the federal government, but there are private student loan options for students who need extra financial support. Repayment of student loans can be difficult, but loans must be repaid within 10 to 25 years and have APRs between 3.73 and 6.28 percent.
Perhaps the most well-known type of loan, a mortgage is a loan used to finance the purchase of real estate. There are different types of mortgages for different types of buyers; first-time home buyers typically utilize a different mortgage than real estate investors. Like an auto loan, mortgages use the property purchased as collateral, so failure to pay could result in foreclosure. You have some control over the terms of your mortgage: You can decide between 15 and 30-year repayment terms, but your interest rate depends entirely on your credit score and income as well as current economic activity.
Personal loans are loans provided to individuals for a variety of purposes, from paying for a wedding to consolidating debt. Some personal loans have purpose-driven titles, but most function in similar ways, with repayment terms between one and five years and APRs between about 6 and 36 percent. Personal loans can be funded exceedingly quickly, making them an advantageous financing option for individuals who need money quickly, but it isn’t always easy to qualify for a personal loan and the higher payments can make them difficult to fit into the average budget.
Small Business Loan
If you are wondering what are small business loans, your answer is in the name. Small business loans are loans offered to small business leaders who need additional funding to help their venture survive and thrive. For many entrepreneurs, taking out loans is more attractive than other methods of initial funding because it allows them to retain complete control over their business plan. Loans are also available to help established businesses stay afloat during slow seasons or expand into new markets. Terms of small business loans vary widely based on the loan product, the lender, and the borrower’s circumstances, so small business leaders should consult with lenders today to better understand their options.
When you need money but can’t wait until payday, you can receive an advance of your paycheck by taking out a payday loan — but you probably shouldn’t. Payday loans are considered predatory loans because they have extremely short repayment terms, extremely high APRs, and dozens of hidden fees. Even if you borrow just a few hundred dollars, you could repay your lender thousands of dollars, putting you in a worse financial position than you were in before the loan.
Pawn Shop Loan
Another financing option typically used by individuals who need money fast, pawn shop loans allow you to use personal possessions as collateral. Pawning involves yielding a piece of property, such as a game console or a diamond necklace, for its value in cash. When you repay your debt — as long as it is within a certain window determined by the shop owner — you will have your item returned, but if you fail to repay your debt, the shop can sell your goods. Unlike other loans on this list, your credit score is not a factor in determining the terms of the deal. Rather, the shop owner has complete control over lending terms.