4 Different Types Of Loans
Staying on top of your loan management starts with understanding your different types of loans. Each one comes with varying repayment terms which can help you with your loan planning and budgeting. The first thing to understand is the difference between secured loans and unsecured loans. Secured loans are backed by some sort of collateral, or physical property that you own, which can be used to repay your private lender in case you default on the loan. Unsecured loans, on the other hand, are not associated with any collateral so you can’t have anything you own repossessed. But which of your loans falls into each category? Read on to find out – and why it matters.
Student loans are considered unsecured loans, meaning that they are based solely on your creditworthiness. They fall into two categories: federal loans and private loans. Most federal loans offer low fixed interest rates, a generous grace period after graduation, and income-based repayment programs. Some federal loans are even subsidized while you’re in school, meaning the government pays for the interest as long as you’re enrolled at least part-time. If you don’t remember which type of federal student loan you have, check your paperwork or call your loan servicer to determine all of your repayment options. While federal loans cannot be refinanced to change the interest rate, you can consolidate several loans to have just one payment each month, or to lower your payments by extending your repayment period. Just remember that in doing so, you’ll end up paying more interest in the long run. This decision depends largely on your debt management and how easily you are able to meet all of your current monthly obligations.
Private student loans, while also unsecured, tend to have higher interest rates than federal loans and are often variable. That means they can change as the broader interest rate market fluctuates, causing your monthly payment to change along with it. However, you can always refinance your private loan with another lender to find a lower rate or switched to a fixed interest rate. Another difference between federal and private student loans is that you must begin paying them off immediately after graduation – there is no grace period. Additionally, any interest that accumulated while you were in school will be added to the principal, essentially increasing your total loan amount.
One important factor to note about student loans, whether federal or private, is that unlike most other loan types, they are rarely erased if you file for bankruptcy. Regardless of what other type of loan debt you have, the fact is you’ll most likely carry your student loans until they are repaid in full.
Home Equity Loan
Typically, a home equity loan is considered a secured loan, with your house being used as collateral. Also referred to as a second mortgage, this type of loan allows you to tap into your home’s equity to finance large expenses like renovations, medical bills, or college tuition. You can also use these loans to clear debt, although banks generally require strong credit and a debt-to-income ratio under 43%. It’s important to responsibly manage your loans relating to your home because if you go into default, the bank can initiate a foreclosure and force you to leave your home. If you are selling your own home, the initial mortgage is paid off first, followed by the home equity loan. You only receive cash from the sale if there is enough money to pay off all the liens against your home. Avoid any potential default issues with your home by budgeting each month to ensure you can make your mortgage payment.
An auto loan is another loan secured by your property, such as your car, boat, or motorcycle. Most people finance their auto loans either through a direct money lender or through a car dealership. Most car dealerships eventually sell the loan to a servicer who will receive your loan payments. Look at both types of loans to determine who offers the best rate and terms. If you already have a car payment, manage your loans by reevaluating the lending environment to determine if you can get a better interest rate. This could lower your monthly payment and save you money in the long run. Whether interest rates have dropped since you purchased your vehicle or your credit has improved, it never hurts to try to renegotiate your rate or refinance with another lender. Plus, it’s a relatively quick and easy process, since nothing has to be appraised and fees are minimal.
Many borrowers take out a bank loan for personal reasons, whether to use the loan to clear debt with a lower interest rate or finance new major expenses. Many banks offer personal loans ranging from $1,000 to $100,000. Whether the bank loan is secured or unsecured can vary and largely depends on your credit. If collateral is required, a bank may request cash savings to be used as collateral rather than your personal property. One benefit of using a savings account for this purpose is receiving a lower interest rate; however, remember that those funds may be appropriated if you default on your loan. Many banks also accept your car or home as collateral to help you get approved for the funds you need. Like other types of loans, lenders also consider your credit history and current debt, along with other factors, to determine whether you qualify for a bank loan.
Understanding your different types of loans is an important part of creating a successful loan management system. By prioritizing and budgeting your money wisely, your debt management will become less overwhelming and you’ll notice those outstanding balances diminishing each month. If you need professional help, contact an accredited organization to learn about your other options.