Have you ever looked at the many loans available and wondered what types of loans fit you best? You may have noticed options like the VA loans, conventional loans, and FHA loans that fit various needs.
After all, people borrow money for various reasons such as home renovations and student tuition. Learn more about these options, so you can choose wisely.
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Types of Loans
There are two kinds of credit you may borrow depending on your needs. The first is open-end credit that may be used for almost every purchase. In fact, it’s the kind frequently used worldwide to pay for daily expenses like groceries. As you already know, these usually entail monthly payments with fixed rates of interest.
On the other hand, there are closed-end loans meant for specific, hefty expenditures such as mortgage loans and car loans. Similarly, these are also repaid through monthly payments that are commonly known as installments. In addition, these also have a monthly interest rate that varies according to a myriad of conditions.
What’s more, loans may also be classified according to collateral requirements. To qualify for a loan, credit unions take into consideration certain factors. Some loans called secured loans require you to surrender particular assets, so those can ensure repayment. Naturally, lenders want to ensure their money returns to them, so some require borrowers to surrender assets in case they fail to repay.
In contrast, there are unsecured loans that risk no assets. However, these may jeopardize your financial future, as failure to repay will deduct points to your credit rating. Many vital aspects of peoples’ lives depend on credit scores such as job applications and academic opportunities. As such, the best types of loans are those you may certainly repay.
One of the options reserved for homeowners is a home equity loan. It depends on your property’s equity, a percentage of the difference between its current value and your mortgage. You may borrow around 85% for a loan amount but that may not apply to your situation. Check with your mortgage lenders and other financial institutions to make sure.
More importantly, be certain that you can pay it back, as you may risk foreclosure instead. Home equity loans are secured, taking your house as collateral. Worse, taking this kind of loan may take your financial situation deeper into debt. Alternatively, you may take out a home equity line of credit (HELOC) instead, in order to take smaller chunks of home equity.
When to Use Home Equity Loans
Since it involves amounts that depend on your home, it’s naturally suited for fixing or improving it. Lenders will only agree to issue these for home maintenance or renovation. These usually require considerable expenditure, and home equity neatly provides for them. What’s more, you may use it to earn tax benefits.
You use one of the best types of loans every day as you swipe without a second thought. The credit card has been a worldwide staple in daily spending for decades. Each plastic strip has a corresponding credit limit and monthly interest rate for your purchases. Aside from grocery shopping, it’s now used to buy products and use services online.
However, it’s been a source of debt burden for many across the globe. In just the US, there are credit card debts worth billions. If you aren’t careful, your debts may snowball enormously, severely hobbling your financial situation. Studies have shown that people spend more using plastic since it triggers no response similar to cash transactions.
When to Use Credit Cards
Thankfully, some cards may let you perform a balance transfer that facilitates paying off debt. You may negotiate to pay your debts’ total without paying interest using these cards. Keep in mind that this introductory period may last only about a year, so pay back the loan as soon as possible. Otherwise, you’ll begin to receive high interest that may hamper debt payoff further.
As we’ve mentioned, credit cards are great for minimal, daily expenses. It’s certainly more convenient than taking out a loan for a month’s groceries! Still, it’s best for disciplined spenders who keep track of their payment histories. Moreover, understanding your card’s terms and conditions is a must.
Debt Consolidation Loans
Another one of the best types of loans is to consolidate your debt, borrowing an amount to pay off all your existing debts in a lump sum. As we’ve said, you may pull it off with a credit card. However, debt consolidation loans only apply to loans with no collateral. You can’t include secured balances like auto loans into the lump sum.
Consolidation may be unsecured or secured as well. While you may prefer not risking your assets, lenders only offer these to people with good credit. If you don’t, you may have to settle with consolidations that require collateral. Additionally, you may receive worse terms and conditions for having bad credit.
When to Use Debt Consolidation
It’s better to use it for facilitating debt payoff. If you’re struggling with debts and having trouble keeping track of them all, this may be a great solution. The lower interest rate for the lump sum might help you save money compared to repaying each one individually. However, analyze your options, as some may cause you to increase payment for debts instead.
For those with bad credit, having someone co-sign for you may be the best choice. Some lenders may allow you to take out loans if someone with better credit enters the loan agreement with you. Doing so binds you and your co-signer to the loan, including its repayment. If one of you fails to pay it back, the other must do so, or you both risk the corresponding penalties.
This isn’t the best type of loan to take out with someone you’re uncertain about repayment. In fact, many relationships have been ruined due to sharing debt burdens. After all, you share the negative consequences if you don’t pay the loan back in time. That’s why you must both be absolutely sure that you can pay back such a loan.
When to Use Co-Sign Loans
Some may not be allowed to borrow money due to their poor credit, or may only do so with unfavorable terms and conditions. Having a co-signer binds someone creditworthy to your loan, so lenders are more inclined to offer you better deals. On the other hand, you may co-sign for someone, potentially giving them the assistance they need to better their financial situation.
Variable Rate Loans
These are options that rely on benchmark rates set by banks. They have a fluctuating interest, but they typically carry lower APRs than fixed-rate alternatives. They may include limits to how much your rate may vary over a specific duration and the loan’s total duration. In addition, these will vary depending on the borrower’s credit rating, asset type, and other factors.
When to Use Variable Rate Loans
These are best when you are certain in paying back the loan briefly. While these may seem attractive for borrowers, you must be wary of benchmark rate changes. These may fluctuate against your favor in the long run, as lenders may adjust rates to reflect market changes. If you can pay it back early, you may avoid such a scenario.