There are many different kinds of loans available from your bank, but the type of loan you choose will depend on your financial situation and how much you need. Here are five types of loans that can be taken out from a bank and how to decide which one is right for you.
Secured Loans
A secured loan is when you borrow money and put up collateral, such as your home or your car, to secure the loan. If you can’t repay the debt, the lender can take your collateral. The interest rates on secured loans are typically lower than those on unsecured loans because there’s less risk for the lender. The most common types of secured loans are mortgages and auto loans. In both cases, lenders hold an asset that they’ll get back if the borrower defaults on their debt. Credit cards also have a form of security in place – your credit score – but it isn’t usually enough to convince a lender that they’ll get their money back if you don’t pay them back.
The most common type of secured loan is a mortgage. When you get a mortgage to buy a house, you’re borrowing money from your bank and giving it legal ownership over your home. If you don’t pay back your loan, your bank can seize and sell your home to make sure that they recoup as much money as possible. Secured loans are also known as collateral loans. Credit cards work in much the same way – if you don’t pay off your debt, your credit card company can take legal action against you to recover their losses.
Unsecured Personal Loans
Also known as a signature loan, an unsecured personal loan is a loan that’s not backed by any collateral. In other words, if you can’t make your payments, the lender can’t take your home or car like they could with a secured loan. The upside to an unsecured personal loan is that it can be used for almost anything—from consolidating debt to financing a large purchase. If you have bad credit, there are lenders who specialize in these types of loans and may offer lower rates than what you would get from a traditional bank.
Interest rates on these loans range from 8% to 29%. Unsecured Personal Lines of Credit: Similar to an unsecured personal loan, but it allows consumers access to funds up to $250,000 over time and for a set period (usually one year). These lines typically don’t require monthly payments; instead borrowers pay interest only when they borrow money. Unlike credit cards where the line size is determined by credit limits, this type of line requires approval from the financial institution and can vary in size based on how much the bank thinks you will need.
Business Loan
A business loan is a loan that is given to a business instead of to an individual. The requirements for a business loan are usually more stringent than for a personal loan, and the interest rates are usually higher. However, business loans can be used for a variety of purposes, including start-up costs, expansion, equipment purchases, and working capital. As long as your credit score is high enough, you should have no problem qualifying for a business loan.
While business loans are harder to obtain than personal loans, there are many benefits. First, business loans typically have lower interest rates than personal loans. This is because you’re borrowing money to help your business grow and create a profit—you’re not using it for any type of personal consumption. Second, while personal loan rates can change after you’ve signed your contract, most business loan rates will stay steady over time (although they may fluctuate depending on market conditions). Finally, lenders who issue business loans tend to be more flexible with repayment options than lenders who offer personal loans. For example, some business loan contracts allow you to make weekly or monthly payments instead of paying off your balance in one lump sum. This is helpful if your cash flow isn’t consistent from month-to-month.
Overdraft Loan
An overdraft loan is a type of loan that allows you to borrow money from your bank account if you need to cover an unexpected expense. This type of loan can be helpful in a pinch, but it’s important to remember that you’ll need to repay the borrowed funds plus interest and fees. You should also keep in mind that some banks will charge an overdraft fee on the transaction amount when you spend more than what’s available in your account.
If you don’t want to worry about paying interest and fees on your overdraft loan, it may be best to make a payment plan with your bank instead. In addition to being less expensive than an overdraft loan, a payment plan could help you avoid incurring any additional charges by keeping you aware of how much you’re spending and what’s available in your account. However, like an overdraft loan, a bank will charge additional fees if there isn’t enough money in your account when you need it. To prevent these costs from adding up, be sure to set aside enough cash for regular expenses so that there’s always money available when you spend.
Installment loan
An installment loan is a loan in which you borrow a set amount of money and then make fixed payments until the loan is paid off. This type of loan is often used for large purchases, such as a car or home. The main benefit of an installment loan is that you can spread out the payments over time, making it more affordable than a lump-sum payment. On the other hand, this loan may not be ideal if you have problems with your credit rating because it will show up on your credit report.
Credit card: A credit card is a type of revolving loan in which consumers pay only part of their balance each month and receive another round of credit. Credit cards are typically not given to people with poor credit scores because they come with high interest rates (sometimes as high as 25% APR).
The annual percentage rate, or APR, is a measure of what your interest will be each year. If you have a high credit score and low debt, you’ll likely qualify for lower rates and get a better deal. On average, credit cards have an APR between 15% and 24%. Auto loan: An auto loan is typically used to buy a new or used car. Interest rates on auto loans are typically higher than on other types of loans because they don’t come with tax deductions like mortgages do. For example, those in South Carolina pay between 3% and 8%, depending on their FICO score and other factors. There are two different types of auto loans: traditional and financing leases.