The 8 Most Common Loan Types Explained

Taking out a loan can be a tricky task. You need to be well informed on the different loan types available and the terms they come with. With so many options, it’s important to understand the differences between them and what best suits your needs. So, with this thought in mind, we made this guide so you can take a look at some of the most common loan types that you should know about.   

But firstly, you may be confused about why this is so vital in your journey to secure the financing you need. Well, knowing different loan categories gives you the great opportunity to find the one that will serve the purpose you intended it to.   

In this article, we will go over eight types of financial loans and explain them thoroughly, so you will end up making the best decision.   

1. Personal Loans

The first one on our available types of loans list is personal loans. They are usually fixed-term loans used for various purchases or debt consolidation. The interest rate on a personal loan is usually lower than that of a credit card, making it a good option for people who need to borrow money but don’t want to rack up high-interest charges and monthly installments.  

This category consists of many different loans and here are the most common types you should know about:   

• Unsecured personal loans. These loans are not backed by any collateral and are based solely on your creditworthiness. They tend to have higher interest rates but can be easier to qualify for.  

• Secured personal loans. They are backed by collateral, such as a home or car. This means that the lender has a security interest in the asset and can seize it if you default on the loan. Secured personal loans typically have lower interest rates than unsecured loans.  

2. Auto Loans

As the name suggests, auto loans are used to finance the purchase of a new or used vehicle. The terms of an auto loan are usually shorter than those of a personal loan, and the interest rates can be a little bit higher. The loan is also secured by the vehicle itself, which means that if you default on the loan, the lender can repossess the vehicle.  

The most common type of auto loan is a conventional loan, which is offered by most lenders. A conventional loan typically has a fixed interest rate and requires a down payment. Another type is subprime auto loans. These loans typically have high-interest rates and fees, but may be the only option for borrowers with no credit history or poor credit.  

3. Student Loans

Student loans are designed to help students pay for college tuition and other related expenses such as room, books, and supplies. There are two types of student loans: federal student loans and private student loans. Federal student loans generally have more favorable terms than private ones and are backed up by a government, making them less risky for both borrowers and lenders.  

Other types of loans include private loans, which are issued by banks and other financial institutions, and Perkins loans, which are need-based loans available through your school.  

The interest rate on student loans is usually fixed, meaning it will not change over the life of the loan. Private loans can in some cases have variable interest rates.  

4. Mortgage Loans

Mortgage loans are used to purchase a home. They are also secured by the home itself, which means that if you default on the loan, the lender can foreclose on the house.  

There are many different types of mortgages available to homebuyers. The most common loan types are conventional loans, FHA loans, and VA loans.  

• Conventional Loans. They are available from private lenders like banks and credit unions. and can be either fixed-rate or adjustable-rate.  

• FHA Loans. They are government-backed mortgages that are available to low- and moderate-income borrowers. These loans typically have lower down payment requirements than conventional loans.  

• VA Loans. They are available to eligible active-duty military personnel and veterans. These loans often come with no down payment requirements and offer favorable interest rates.  

5. Home Equity Loans

Home equity loans allow homeowners to access the value of their home by borrowing against it. They can then use this loan for a variety of purposes, including debt consolidation, home improvements, and major purchases.  

There are two types of home equity loans: traditional home equity loans and lines of credit. Traditional home equity loans have a fixed interest rate and repayment period, while lines of credit typically have a variable interest rate and allow borrowers to draw on the line of credit as needed.  

If you’re considering a home equity loan just remember that your home is used as collateral for these loans, so be sure you can afford the monthly payments before taking one out.

6. Debt Consolidation Loans

Debt consolidation loans are used to consolidate multiple debts into one single loan. This can be beneficial if you are struggling to make payments on multiple debts, as it can simplify your monthly payment obligations. Additionally, this can also save you money on interest charges. There are a few different types of debt consolidation loans, so it’s important to choose the right one for your unique situation.  

The most common type of debt consolidation loan is a personal loan. And the other common loan type is a home equity loan or line of credit.  

7. Payday Loans

A payday loan is a type of short-term high-cost loan where a lender will generally lend $500 or less. The amount you borrow will typically be due on your next payday.  

Payday loan lenders charge high-interest rates but issue these loans in a few minutes. They are also called cash advance loans or check advance loans.  

Depending on your state law, payday loans may be available through storefront payday lenders or online. 

8. Small Business Loans

Businesses often need access to capital in order to grow and expand. There are a variety of business loans available, with terms and interest rates that vary depending on the purpose of the loan and the borrower’s creditworthiness.  

The loan is usually secured by business assets, which means that if you default on the loan, the lender can seize those assets.  

There are many different types of loans available to small businesses, each with its own set of pros and cons. The most common types are:  

• SBA loans. SBA loans are government-backed loans that offer low-interest rates and long repayment terms. However, they can be difficult to qualify for and the application process can be lengthy.  

• Bank loans. They are typically one of the more affordable options for small businesses, but they can be difficult to qualify for if you have bad credit.  

• Alternative lenders. Alternative lenders such as online lenders or peer-to-peer lenders offer fast and easy access to capital, but they often charge higher interest rates than traditional lenders.  

Bottom Line

There are many loans that you may come across in your lifetime. So, in this article we tried to explain different loan types and what they are typically used for.  

Even though many people overlook the importance of knowing what the different kinds of loans are, we assure you that by taking some time to educate yourself you can make the best decision when it comes to choosing the one that fits your needs.  

Always consider interest rates and terms you are getting offered and take some time to come up with a repayment plan. And if any of this gets too overwhelming for you, try finding a financial advisor.