A loan is a lump sum of money that is given to a borrower by a lender. The borrower then repays the loan amount plus interest over a given period. Both lenders and borrowers need to understand the various kinds of loan products there are. With this information, borrowers will know what loans to take up and lenders will know the loan types that would work for them. A lender may choose to offer one type of loan or combine several. Here is a look at the 7 main types of loans.
These are the broadest kind of loans. They can be used for any purpose ranging from sorting emergencies to paying for weddings to consolidating debts. Some lenders will limit the use of personal loans but it is advisable not to be too strict. After all, someone is taking the loan for personal needs. Denying them the loan may mean they will get it from a competitor.
There are secured and unsecured personal loans. The secured type needs some form of collateral such as a savings account. On the other hand, unsecured loans do not need any collateral. They are given to people with good credit and tend to have high rates.
The amount of money you can be given as a personal loan may be anything between a few hundred to thousands of dollars. The repayment period may be between two and five years.
These are short-term loans that are due on the next paycheck. They are best suited for solving emergencies when one does not have any savings. They may help cover a medical bill that just comes up or put food on the table on a tight month.
Lenders issue payday loans without looking at their credit score. They are usually processed within a short time. This makes them one of the most popular loan types. With many borrowers opting for this loan product, lenders can benefit from using payday loan management software. This will help them automate the entire process from lending to collecting so they are up to date with all loans. You will be able to process loan requests faster which increases customer satisfaction.
These are loans taken to pay for school-related expenses. These may include tuition, books, and housing. These loans are available from private and federal lenders. The latter tends to be a cheaper alternative but private lenders offer loans even to those with poor credit.
The repayment period for student loans ranges between 10 and 30 years.
These are loans that will help one purchase or build a house. There is a high demand for this loan type because of the high cost of homeownership. Many opt to borrow the amount needed and pay it over 10 to 25 years. The rates are usually low ranging from 2% to 3%.
To qualify for mortgage loans, a borrower needs to have a credit score of 600 or higher. There are various types of mortgage lenders including banks and brokers. Private lenders also offer mortgages. The rates and qualifications will differ from one lender to the other.
These are meant to finance the acquisition of automobiles like cars and motorcycles. The lender pays for the car and has the option of repossessing the car in case the borrower fails to make payments. You do not need a good credit score to qualify for this loan type but, a better score qualifies you for better rates.
The duration for servicing an auto loan may range between 24 and 72 months. The rates are usually between 3% and 7%.
This is a type of loan that is secured by a title. This may be your car’s title or that of a parcel of land you own. This loan may be put to personal use. The lender retains the right to sell the property used as collateral in case of failed loan repayments.
The amount of money you can get with a title loan will range be between 25% and 50% of the property’s value. The interest rates are usually high and this loan needs to be repaid within a short time.
Small businesses with up to 300 employees qualify for various kinds of loans. Equipment, working capital, and term loans are among the most common. These loans are meant to help business owners grow the business by adding the needed finances.
Small business loans are easier to get than personal loans. One needs to provide the business accounting details and business plan. The lender can then decide how much the business qualifies to borrow.
A lender needs to offer loan products that are high in demand. Borrowers on the other hand want the best rates. Understanding the various types of loans helps both parties make the right decision on what to do.