Nearly every person in the world has had some point in their life where they desperately wanted, or needed, to buy something, but just couldn’t. Whether is was due to a lack of funds, a fear of commitment, a lack of time, or a combination of all of these things, everyone has periods where they just don’t have the things they need. One option to get the things that you may want and need, and that many people qualify for, but surprisingly few take advantage of, is to take out a loan.
There’s a great many misconceptions surrounding loans, and many people regard them as terrifying, impossible to understand affairs, with numbers and terms, that, for many, may as well be written in an alien language. But odds are, sooner or later, you’re going to need a loan, and it’s in your best interest to start learning about them now.
When it comes to loans, one of the most confusing aspects, for many people, is simply understanding what the different types of loans are, and what they’re used for. In this guide, we’ll explore some of the most common types of loans, what they’re primarily used for, and some key considerations you need to make before you choose to commit.
Personal Loans
One of the most widely used type of loan, and one of the most variable in terms of application, is a personal loan. Personal loans, as the name implies, are loans that are granted to individuals to fulfill a personal objective. Personal loans can be used for anything from taking a vacation, to renovating a house, to consolidating debt.
Personal loans tend to be smaller amounts of money, often just enough to cover an expense that people can afford, and could in fact realistically save for in a reasonable amount of time, but either want to take advantage of now, or use to improve their financial circumstances. Often, personal loans have smaller repayment timelines, with anywhere from one to four years being typical, although they can be shorter or longer depending on the lender.
Personal loans are also offered by a wide variety of institutions, including banks, credit unions, and private lenders. For the borrower, this means that you have a wide range of different lenders to choose from, so you have ample opportunity to find the best lender for you. However, this also means that you’ll need to invest time and effort to find the right lender to give you the loan you need.
Mortgages
Mortgages are loans designed specifically for the purchasing of a home. Mortgages tend to be by far the most complex and intricate of any loan you’ll find, with numerous factors and numbers coming into play, and so, can be the most difficult to both understand and shop for.
To begin with, understand that if your credit score isn’t very good to great, don’t count on being able to qualify for a loan that will get you what you need. Mortgages tend to have very strict terms that applicants must abide by, though the terms vary widely depending on credit score, the value of the home, and numerous other factors. Mortgages are also unique in that most mortgage lenders actually require some additional steps on your part before they’ll grant you a loan.
For example: most mortgage lenders require that you already have homeowner’s insurance purchased prior to receiving the loan. Some even require that you take an additional step and purchase mortgage insurance. This is because, when it comes to home buying, your lender actually assumes responsibility for the property until you fully pay it off, so if you default on your mortgage, the property becomes their problem.
With all that being said, mortgages are really the only way most people can afford to purchase a home of their own. Houses are more expensive than they’ve ever been before, and saving for a home isn’t practical, as it would take decades. Instead, get your credit score up, save up enough to make a down payment of around 15 to 20% of the home’s value, then begin shopping.
College Loans
College loans are, you guessed it, intended to help pay the tuition, fees, and other miscellaneous expenses accrued from pursuing an advanced degree of education. What distinguishes college loans from other types of loans, aside from the specific purpose associated with them, is the fact that most student loans allow applicants to have little to no credit, and still qualify to receive them.
Since college loans are primarily intended for high school graduates who couldn’t otherwise afford to attend college, lenders understand that most applicants are not going to have any extensive credit history to gauge, and it would be impractical to expect a high credit score from someone who may or may not even have a credit card yet.
With that being said, there are plenty of stipulations and reservations that come with college loans. Depending on the degree, and what you may plan to pay for out of pocket versus taking out a loan for, not only can your rates vary, but you may have to use multiple lenders to cover all of your college expenses. While there are a multitude of federal loans and grants you can take advantage of, it may not cover everything, and you made need to take out additional loans.
College loans can also be dangerous because they are for a very large amount of money, in some cases equivalent to the price of a new home, that must be repaid nearly as soon as you graduate. In a job market that’s on the rise, college graduates are having an easier time landing their first job, but it’s still very competitive, and your lender won’t wait for you to gain employment before the bills start coming.
If it is at all feasible, take advantage of any scholarships and grants, and use as much from federal loans programs as possible, before you choose to pursue a private lender for college loans.