Defaulting on a loan could mean the difference between just scraping by and living your best life. There is a breakdown of the types of loans out there and what they have in common so you can find the one that’s right for you.
There are four types of loans that are commonly offered by banks or credit unions: installment loans, lines of credit, personal lines of credit, and home equity lines of credit.
Types of Loan
Lines of Credit. In short, this loan works like an extension on the line of credit you already have. Essentially, you can borrow up to a certain amount of money at a low-interest rate. You can pay it back all at once or spread out the payments over time.
Home Equity. This is the most flexible loan on this list, and it works by using the equity in your home as collateral. The interest rate is usually lower than other loans, but it can be a riskier option.
Installment Loans. These loans are created with a set number of monthly payments. These are good for those who can afford to make their payments but need a little more time.
Personal Lines of Credit. These loans work almost the same way as a line of credit, except that they’re different because they are private and because you don’t have to pay off the entire amount right away. They’re also a bit riskier because they can be used for more expensive purchases.
Owner-Occupied Home Loan. You may be wondering “What is an owner-occupied loan?” It is a mortgage made to a borrower who plans on living in the home for the duration of and after the mortgage. In this type of loan, there are no restrictions on what can be done with the property as long as it stays an owner-occupied residence.
Pros and Cons
This might seem like a simple, black-and-white list, but each loan has its pros and cons. You should look at each one to see if it can work for you.
Limits. While installment loans can be pretty flexible, there are some terms that you should know. Set a limit, and it’s going to work a little differently. If you want to go over your limit, make sure to ask your lender if it’s possible.
Fees. This is arguably the most important part of any loan. The fees may change depending on who’s loaning you money, but they can be pretty pricey. When you apply, you should ask them if there is a fee associated and how much it will be.
Interest Rates. Lower interest rates are always a good thing. You should look over the rates on each loan to determine which one is best for you. If a lower rate is important, then pay close attention to these terms and make sure you’re aware of how they work.
Duration. The longer your loan lasts, the more you’ll have to pay in interest. You might be able to get away with a shorter duration if you can manage it financially otherwise, go for something that’s longer so that you can make smaller payments each month.
Prepayment. This is great if you know that you’re going to need to use the money in the long run, but you don’t know-how. Look at how much your loan would be if you were to make monthly payments and then prepay it with what you can afford. If there is a prepayment fee, ask if this is a regular thing.
How to Choose the Right Option
The perfect loan for you depends on your needs. If you have lots of assets or other collateral, you could get approved for an installment loan. If you’re looking to save money on interest rates, a credit secured line of credit is probably your best option. If you want to use your home equity to finance things, a personal line of credit is the way to go.
Conclusively, the ideal loan is going to depend on your circumstances, and it’s up to you which one you go with. Prospective borrowers should weigh options carefully before applying for a particular type of loan. Customers should be aware of the terms and conditions associated with every loan offered to avoid any surprises down the road.