Exploring Types of Loans
Taking out loans can be helpful for a number of expenses. However, it is important to use them responsibly so you don’t end up with unnecessary and expensive debt.
Personal, business and mortgage loans all have different terms, interest rates and qualifying criteria. But knowing your loan options can help you find the best one for you.
Personal Loans
There are many different types of personal loans available, each with its own APR range, loan amount and payoff timeline. Many lenders also offer multiple personal loan options, such as secured and unsecured, to meet unique borrower needs and budgets.
For example, a debt consolidation personal loan can help consumers pay off high-interest credit card balances and reduce their overall monthly payments by consolidating multiple bills into one. And a home improvement personal loan can help homeowners finish home renovation projects that can increase the value of their home and make energy-efficient upgrades.
When exploring personal loan options, look for a lender that considers your credit score, debt-to-income ratio and financial profile holistically when making approval decisions. This can improve your chances of getting a personal loan, even if you have lower than ideal credit. You can find lenders that do this, like OneMain Financial, online or at your local bank. This type of lending can be less stringent than traditional auto or mortgage loans and may provide an alternative option when your credit score doesn’t qualify you for other loan programs.
Business Loans
Many financial institutions offer business loans and lines of credit, from large commercial banks to local lenders and credit unions. These are typically designed for businesses that have been in operation for multiple years and have established a solid credit history. These financing options tend to come with lower interest rates than personal loans but may require a longer application process, Detweiler says.
Business loans are usually installment credit, in which borrowers receive a lump sum of money and pay it back in fixed payments over time. They are generally reserved for more established businesses and often have a specific purpose listed on the application, Detweiler notes.
Often, business loans are secured by collateral, such as equipment or property, which the lender can seize in the event of a default. Lenders also might request a detailed business plan and financial statements. Some lenders might also ask for a personal guarantee and require that a borrower have good or excellent credit to be approved.
Mortgages
Mortgages are one of the most common types of loans, and they come in a variety of flavors. For instance, some are government-backed or insured, while others feature more flexible loan terms and qualifying criteria. Other differences include whether the mortgage is for a primary residence, second home or investment property.
Debt consolidation loans are a good way to pay off high-interest credit card debt and make your monthly payments more manageable. They can be secured or unsecured, and they may have fixed or variable interest rates.
A personal line of credit is a revolving type of financing that gives you a set amount of money to borrow from time to time. You’ll receive a monthly bill with a credit limit, pay a minimum payment and pay interest based on the outstanding balance. Personal lines of credit can be open-ended or closed-ended, and some lenders offer a hybrid solution like a HELOC. Open-ended lines of credit can be tapped again and again, while closed-ended loans require you to apply and be approved for each draw.
Lines of Credit
A credit line offers a flexible way to borrow cash. It’s similar to a credit card, but it may offer a lower interest rate and has a higher credit limit. Like personal loans, some lines of credit require collateral, but others are unsecured.
A business credit line can be a useful financing option for entrepreneurs. You can draw on it as needed, but you’ll need to repay any money you withdraw each billing cycle. This helps keep your balance low and your credit score high.
A debt consolidation loan can help you pay off your outstanding balances in a single payment each month. You’ll have a single monthly payment instead of several, and you can save on interest charges by paying down your highest-interest debt first.