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Types of Loans & Types of Credit | Debt.org

Types of Loans & Types of Credit

Loan ContractLoan contracts come in all kinds of forms and with varied terms, ranging from simple promissory notes between friends and family members to more complex loans like mortgage, auto, payday and student loans.

Banks, credit unions and other people lend money for significant, but necessary items like a car, student loan or home. Other loans, like small business loans and loans from the Department of Veterans Affairs, are only available to select groups of people. And two atypical loans are payday loans and loans from a retirement account.

Regardless of type, every loan – and its conditions for repayment – is governed by state and federal guidelines to protect consumers from unsavory practices like excessive interest rates. In addition, loan length and default terms should be clearly detailed to avoid confusion or potential legal action.

In case of default, terms of collection of the outstanding debt should clearly specify the costs involved in collecting upon the debt.  This also applies to parties of promissory notes as well.

If you are in need of money for an essential item or to help make your life more manageable, it’s a good thing to familiarize yourself with the kinds of credit and loans that might be available to you and the sorts of terms you can expect.

Types of Credit

The two basic categories of consumer credit are open-end credit and closed-end credit. Open-end credit, also called revolving credit, requires monthly payments that are less than the total amount due.

Examples of revolving credit are credit card accounts and home equity lines of credit. In each case, consumers can use their credit while paying on their account balance.

Closed-end credit provides a fixed amount of money to finance a specific purpose for a specific period of time.

Examples of closed-end credit include:
  • Mortgages
  • Car loans
  • Appliance loans
  • Payday loans

Types of Loans

Loan types vary because each loan has a specific intended use. They can vary by length of time, by how interest rates are calculated, by when payments are due and by a number of other variables.

Student Loans

Student loans are offered to college students and their families to help cover the cost of higher education. There are two main types of student loans: those offered by the federal government, and those offered by private lenders. Federally funded loans are better, as they typically come with lower interest rates and more borrower-friendly repayment terms.

Mortgages

Mortgages are loans distributed by banks to allow consumers to buy homes they can’t pay for upfront. A mortgage is tied to your home, meaning you risk foreclosure if you fall behind on loan payments. Mortgages have among the lowest interest rates of any loans.

Auto Loans

Like mortgages, auto loans are tied to your property. They can help you afford a vehicle, but you risk losing the car if you miss payments. This type of loan may be distributed by a bank or by the car dealership directly. While loans from the dealership may be more convenient, they often cost more overall.

Personal Loans

Personal loans can be used for any personal expenses and don’t have a designated purpose. This makes them an attractive option for people with outstanding debts, such as credit card debt, who want to reduce their interest rates by transferring balances. Like other loans, personal loan terms depend on your credit history.

Loans for Veterans

The Department of Veterans Affairs (VA) has lending programs available to veterans and their families. With a VA-backed home loan, money does not come directly from the administration. Instead, the VA acts as a co-signer and effectively vouches for you, helping you earn higher loan amounts with lower interest rates.

Small Business Loans

Small business loans are granted to entrepreneurs and aspiring entrepreneurs to help them start or expand a business. The best source of small business loans is the U.S. Small Business Administration (SBA), which offers a variety of loan types depending on each business’s needs.

Payday Loans

Payday loans are short-term, high-interest loans designed to bridge the gap from one paycheck to the next. They are predominantly used by repeat borrowers living paycheck to paycheck. Because of the loans’ high costs, the government strongly discourages their use.

Borrowing from Retirement and Life Insurance

Those with retirement funds or life insurance plans may be eligible to borrow from their accounts. This option has the benefit that you are borrowing from yourself, making repayment much easier and less stressful. However, in some cases, failing to repay such a loan can result in tax consequences.

Consolidated Loans

A consolidated loan is a loan meant to simplify your finances. It is a loan that pays off all or several of your other loans and debts, particularly credit card debt. It means fewer monthly payments and lower interest rates. Consolidated loans are typically in the form of second mortgages or personal loans.

Borrowing from Friends and Family

Borrowing money from friends and relatives is an informal type of loan. This isn’t always a good option, as it may strain a relationship. To protect both parties, it’s a good idea to sign a basic promissory note.

Whenever you decide to borrow money – whether it is to pay the bills or buy a luxury item – make sure you understand the agreement fully. Know what type of loan you’re receiving and whether it is tied to any of your belongings.

Also, familiarize yourself with your repayment terms: what your monthly obligation will be, how long you have to repay the loan and the consequences of missing a payment. If any part of the agreement is unclear to you, don’t hesitate to ask for clarifications or adjustments.

Al Krulick

Author

Al Krulick

Staff Writer

Al is an award-winning journalist with dozens of years of writing experience. He served as a drama critic, high school teacher, arts administrator, theatrical producer and director. He also dabbled in politics, running twice for a seat on the U.S. House of Representatives for Florida. Al is a Certified Debt Specialist with the International Association of Professional Debt Arbitrators and specializes in real estate, credit and bankruptcy advice.

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