Banks and various private lenders are constantly making it easier and easier to take out a loan. Unfortunately, the sheer number of different loans that most individuals can access often creates a lot of confusion. While most banks do attempt to explain their offers to those interested, it is usually better to know what various types of loans are before going to the bank.
This having been said, we will look at the 4 most popular types of loans and at what they can be used for. Please keep in mind that each lender may name its deals in different ways, however, they will still have the same structures. While their name is a marketing concern, we will analyse their overall terms and conditions.
Personal Loans
Personal loans are extremely easy to get due to the fact that borrowers do not need a very high credit rating. Furthermore, there are no restrictions when it comes to what you can do with the money. These two characteristics make personal loans the most popular type of debt in the world.
While most personal loans are unsecured, some will require collateral. This usually applies to loans that have a higher value or when they are given out to individuals who have a bad debt repayment history.
Lines of Credit
These are often used as direct alternatives to credit cards. Lines of credit give individuals access to a large amount of money, for a specific time. Just like when using a credit card, the borrower must only pay interest for whatever money he has used. Most lenders offer rates that are lower than those attached to credit cards, which makes a line of credit considerably more advantageous.
The main downside with these is that, unlike a credit card, a line of credit usually needs to be secured against the borrower’s property. Generally speaking, lenders prefer their clients to put up their homes as collateral, or another piece of real estate.
Home Equity Loans
This type of loan addresses individuals who are paying a mortgage on their home and would like to access financing for various projects. As the name implies, this loan is secured against the equity that one has in one’s home. Depending on the lender, these home equity loans can be repaid as a single mortgage, or they can replace the main one that the homeowners are currently paying.
Debt Consolidation Loans
Debt consolidation loans were designed to help individuals that are having a difficult time managing their debt. The loan is usually large enough to cover most if not all of the borrower’s outstanding debt and can be secured or unsecured, depending on the value. This type of loan has low interest rates and makes it easier to repay current loans by transforming them into a singular debt that has one interest rate and requires one monthly repayment.
The main disadvantage of debt consolidation loans is the fact that they are designed only for individuals who have specific difficulties repaying their debt. Those who have only taken out a single loan will not be able to consolidate their debt, however, they may refinance it.
Final Words
These are the main types of loans that are currently offered by both banks as well as private lenders. Each one is more or less designed for specific types of individuals and comes with different pros and cons. Furthermore, keep in mind that the interest rates for each of these are established by the lenders, depending on the borrower’s credit score. This may make certain types of loans even more affordable for those who have great relationships with banks and have built up their credit rating.