Understanding Loan Types
Many lending businesses offer a variety of loan products and services, such as, auto loans, home loans, personal loans, home equity loans, secured loans and consolidation loans. Learning the differences between the products can help you when the time comes to apply for them.
Mortgages and Refinancing
When you are ready to purchase a home, applying for a mortgage is one of the first steps. There are many ways to go about this, but the most common is through a financial institution like a credit union.
Refinancing is also commonly associated with mortgages. Refinancing your home is a process of changing your current loan and replacing it with a new one. This is often done due to lower interest rates offered. The lower rate may result in a lower payment. A new loan can be requested through the lender that houses your current loan or at a different one. (Most homeowners decide to refinance their home when the rates are low. So, if you’re a homeowner, it is a good idea to keep an eye on the rates.)
Both purchases and refinances come with closing costs. Closing costs will differ depending on the lender and the type of loan.
Home Equity Loans and Home Equity Lines of Credit
Home equity loans and lines of credit (HELOC’s) borrow against the equity in a home. They are often used for (but not limited to) debt consolidation and/or funds for home improvements. These loans are secured by your home as collateral.
A home equity loan is a single payment to the borrower of the full balance borrowed. A HELOC is a revolving line of credit, with a draw period and a repayment period. As you pay it back, it is available to you to borrow again during the draw period.
Auto Loans
Buying a car out of pocket is unrealistic for many people. Since this is the case, many choose to take out an auto loan. There are many different choices when deciding to take out an auto loan, and when choosing one, it is important to start with deciding which works best with your finances and what you can afford for a monthly payment. Like a mortgage or home equity loan, an auto loan is a collateral loan. This means that if payments aren’t made, the vehicle can be repossessed.
Recreational Loans
Although this type of loan is not common as the others, this is still a loan product that many financial institutions offer. Recreational Loans are loans that finance recreational vehicles. Whether that be an ATV, an RV, or a boat. These loans are here to make recreational vehicles more affordable.
Personal Loans
Personal Loans are made to be versatile for whatever you may need. Each financial institution offers different types of personal loans for whatever financial decisions you may be making. These come with different interest rates and different timelines for paying off the loan. Personal loans are non-collateral or unsecured loans. Unlike a mortgage or auto loans, there is not a physical asset that is used as collateral. Therefore, rates for personal loans are often higher.
Credit Cards
Having a credit card is a great way to start building up your credit, although, it is important to be responsible with the credit you are borrowing. There are many different credit cards that are offered, and it is important to do your research to find one that works best for you. When you apply for a credit card the creditor will determine how much of a credit line you will receive. This is decided by your credit score, your income, assets, other credit and/or your debts and liabilities.
The longer you have been borrowing money and showing that you can pay it off will usually mean you’ll receive a higher line of credit.
Student Loans
Being a student is difficult and adding tuition costs on top of that can be overwhelming. That is why student loans are offered to those who need them. After filling out the Free Application for Federal Student Aid (FAFSA) if the total that you still owe for school is too much to afford, student loans are there to ease the burden. Most financial institutions will offer or partner with others to offer student loans, but it is good to ask to verify.
Loans can be a great tool when making a large purchase. Staying informed on these products can help you make an informed decision that can help you reach your financial goals.