Money makes the world go round. Fortunately, you don’t need to have thousands of dollars in your bank account to live a good life thanks to the existence of loans. While loans are commonly used to finance big purchases like homes and cars, they can really be used for just about anything depending on the loan type. So read on to learn more about the different types of loans and how you can use them.
Personal loans are one of the most versatile loan options out there, allowing you to use the borrowed funds for just about anything. For example, you could use a personal loan to pay for weddings, vacations, medical costs, home improvements, etc. That being said, some individual lenders do restrict what you can use the loan for, so be sure to read the fine print beforehand.
Personal loans can be as small as $1,000 or as large as $100,000. They typically require a credit score above 600 and have an average interest rate of 9.41% — although your exact rate will depend on your credit score. Personal loans typically have a repayment timeline of 12 to 60 months, although the timeline can go as long as 84 months depending on the initial loan amount.
Mortgage loans allow you to borrow money to purchase a house. This type of loan is particularly useful as many people aren’t able to save hundreds of thousands of dollars in cash to buy a home. For example, the median existing-home price in the United States was $303,900 in January 2021 — and this number is constantly increasing.
With a mortgage loan, buyers can pay a certain percentage of the home price upfront while borrowing the rest from a lender with a payment plan and an interest rate. Common mortgage terms range from 10 to 30 years and interest rates typically range from 3 to 6% depending on your credit score and income.
Speaking of income, you aren’t able to purchase a home of any price. Instead, you have to be approved by the lender for your purchase price based on your income levels. For example, many lenders will only approve you for mortgage payments that will cost no more than 28% of your pre-tax income. So say you make $60,000 a year or $5,000 a month. 28% of that would be a $1,400 mortgage payment.
Not only is this policy good for the bank to eliminate risk, but it’s also beneficial for you so that you don’t buy more homes than you can realistically afford. In addition to your monthly mortgage payment, you also have to consider your down payment. Generally speaking, it’s recommended that you put down 20% of the value of your home. That being said, there are special mortgage programs designed for lower-income or first-time homebuyers that allow you to put down less money.
Home Equity Loans
If you thought that mortgage loans were the only type of home-related loans, think again! There are also home equity loans. Home equity loans allow you to borrow money based on the value of your home minus the balance left on your mortgage. For example, say your house is worth $250,000 and the current balance left on your mortgage is $125,000 — you’d be able to get a home equity loan of $125,000.
You can use the money from your home equity loan for almost anything, making them extremely versatile and valuable if you’ve been diligently paying off your home for a while. With that being said, you’re putting your home up as collateral for home equity loans, which puts you at risk of foreclosure if you can’t make the payments.
Common home equity loan terms involve interest rates that range from 4 to 8% with loan lengths ranging from 5 to 30 years.
It’s also important to note that a home equity loan will be based on the current value of your home, not the original purchase price. So if you did a lot of renovations on the home that increased its value, your home equity loan will be based on that amount. Similarly, if you live in a really good area where property values are constantly rising, your home’s value will naturally increase over the years.
Student loans allow you to borrow money to cover the cost of education. Student loans can cover more than just tuition, including things like housing, textbooks, and transportation. Student loans can be provided by the federal government or by private companies.
Interest rates for student loans provided by the federal government typically range from 5 to 8% depending on the type of loan and whether it’s for an undergraduate degree or a graduate degree. Furthermore, some types of federal loans only start accruing interest after you’ve graduated while others start accruing interest right away. Interest rates for student loans provided by private lenders typically range from 4 to 14%.
Student loans are typically repaid on a 10-year timeline, although extended timelines may be available for those with higher balances. As with any type of loan, it’s important to do your research beforehand and understand all the terms and conditions before signing.
Auto loans allow you to borrow money to purchase a car. This option allows you to purchase a car without paying the total price. Instead, you will put a certain amount of money down and make monthly payments with interest until you have covered the whole purchase amount.
Some car dealers allow you to finance directly through them, while others may require you to go through an outside lender. You can expect to pay interest rates between 3 and 7% depending on your credit. Typically, auto loans have a repayment timeline of 24 to 72 months, depending on the initial loan amount. If you aren’t able to pay back your loan, you risk having your car repossessed as a result.
Starting your own business is part of the American dream, but it can seem impossible due to the startup costs — and that’s where business loans come into play. Business loans provide you with funds to start or run a business.
When it comes to business loans, there are two options: a federally-backed Small Business Administration (SBA) loan or a loan from a private lender. With an SBA loan, the federal government backs a certain percentage of your loan that’s actually provided by a partner organization — eliminating a lot of risk for the lender. This type of loan has strict requirements, involves a ton of paperwork, and may take longer for you to get approved.
On the other hand, there are business loans that aren’t backed by the federal government. You can get these from big banks, but many will have strict requirements that may be impossible for newer businesses to meet. There are also alternative lenders that have more realistic requirements and are able to get you your money quickly. For example, Seek Capital has helped fund more than $400 million with 400 approvals this month alone. So if you’re ready and eager to get your business off the ground quickly, you should consider an alternative lender like Seek Capital.
If you’re in a financial pinch due to some unexpected expenses, payday loans could be the perfect solution. Payday loans are short-term loans that provide you with extra money until your next paycheck. These loans typically involve smaller amounts of money, $500 or less, and can come with a whole host of fees and high-interest rates. These loans also have flexible requirements and are available to those with poor credit histories.
Believe it or not, credit cards also are a type of loan! Every time you use your credit card, you are taking out a small loan from the company while promising to pay it back in a timely manner. If you pay back your full balance by the end of your statement, you won’t be charged interest. Otherwise, you can expect to pay an average of 14.65% in interest in addition to your statement balance.
While that interest rate may seem high, it’s important to remember that it varies depending on the type of card you have and your credit history. When it comes to credit cards, some are definitely better than others. Credit cards often offer perks like cash back or travel rewards that make them more appealing. If you’re trying to figure out the right card for you, check out this handy guide from Seek Capital.
There are loan types out there to fit every scenario and circumstance. That being said, always make sure to choose your lenders wisely and pay close attention to the interest rates, repayment timeframes, and other important details in the fine print.