It’s a new year, which means it’s the perfect time to get your financial house in order. Sometimes it’s best to step back to the basics, especially when it comes to lending.
Loans change all the time – interest rates go up and down, economic factors can limit who is eligible and new loan options are created (or weeded out) every year. Below is a quick overview of the most commonly used loans. Find out how they work, what they’re used for and whether it’s the right lending option for you.
Cash Advance Loans
As the name suggests, cash advance loans are small loans that are meant to provide money quickly for unexpected emergency expenses. You’re basically getting an advance on your next paycheck. You’ll have to pay the money back with interest, but when you’re in a bind and need cash, this type of loan may be the only option.
The big benefits of cash advance loans are you’ll receive funds quickly, you can apply for a loan online and the funds can be used however you want. Be careful to work only with reputable lenders that offer installment payments. This will help you avoid a payday loan situation.
A personal loan is a loan that a person takes out to cover a variety of expenses. They aren’t used for any particular purchase. The borrower can use the funds they receive for anything they want.
Personal loans can be difficult to get because of the risk involved for the lender. These loans considered unsecured loans, which means they aren’t tied to collateral. That translates into higher risk for the lender and more requirements for the borrower.
The lender will consider your income, all assets, all debts and your credit score before deciding to approve a personal loan. Of these factors, credit score is probably the most important in terms of determining if you qualify and what the interest rate will be.
Most Americans own a car, but only a small percentage have enough cash on hand to purchase one without a loan. You can use a personal loan or a car loan to finance a vehicle. A car loan is designed to help the borrower purchase a vehicle from either a private seller or a car dealership. This type of loan is offered through banks as well as the car dealership.
The requirements are very similar to taking out a personal loan. However, the lender will also consider that the car being purchased serves as collateral. That means a car loan is a little less risk than a personal loan, and therefore usually easier to get. Typically, you’ll need to have a vehicle lined up to purchase before a lender will approve a car loan. After all, they want to know exactly what the money is being used to purchase.
Mortgage loans are used to purchase a home. It’s one of the most complex types of loans and there are a lot of different options that fall under this umbrella. The most common types of mortgage loans include:
- Conventional Mortgage Loan
- FHA Loan
- VA Loan
- Jumbo Loan
- Adjustable Rate Mortgage (ARM)
Something to keep in mind is that mortgage loans can be refinanced. This is a sound financial decision if the current interest rates are lower than what you pay on an existing mortgage loan.
Keep in mind that a reverse mortgage loan is very different from the financial tools listed above. With a reverse mortgage (which is only available to homeowners 62 years old or older) you receive monthly payments from the lender that come out of the equity. Some people use reverse mortgages in retirement to ensure they have enough money to cover the cost of living.
Home Equity Loan
After you use a mortgage loan to purchase a house, hopefully, the property will increase in value. You’ll also increase the equity every time you make a payment and pay down the balance of the loan. One benefit if homeownership is being able to tap into your equity.
A home equity loan can be used to borrow against the value of your home. Essentially, the equity in your home acts as collateral. There’s also something called a cash back refinance loan that can be used to tap into the equity of a second home or investment property.
These are just a few types of loans that consumers use every day to make large purchases, leverage their assets and cover emergency expenses. If you have questions about how a specific loan works, be sure to talk with a knowledgeable financial advisor.