Have you ever found yourself in a tough financial situation? If you’re like most people, when you find yourself in need of funds, you’re going to spend a lot of time figuring out a solution. Researching all your options and listening to people’s different opinions can be daunting.
Navigating through all the different loan types offered by various financial institutions or private lenders can be confusing and stressful. But don’t worry—there’s a loan for every situation.
Below are some of the most common types of loans, which fall under two categories: secured loans and unsecured loans.
If you apply for a secured loan, you need to provide the lender with collateral — in other words, a personal asset, like your home or vehicle. This is like insurance in case you default on your loan, in which case the asset will be transferred to the lender until you can repay them.
The interest rate and loan amount depend on the value of the property you leverage; i.e., a higher value can get you a larger loan, and therefore a lower interest rate.
The following are the most common type of secured loans:
Home loans are quite common. They involve borrowing money against the value your home. They can be used for repairs, renovations, and myriad other purposes. The collateral, of course, is your home.
How it works: A lender evaluates your primary or secondary residence, and you can get up to 80% of the value of your house as a loan. The interest rate varies according to the market price, payment terms, and credit score.
Vehicle loans are becoming increasingly common especially with their low down payments schemes. The collateral in this case is the car. Note that you can only typically apply for an auto loan if the car you want to purchase is less than five years old.
Advantages of Car Loans: Usually, you can choose the payment frequency, as well as choose between fixed or variable interest rates. A fixed interest rate remains unchanged during loan duration, while a variable interest rate fluctuates based on the current market
A business loan, also known as a commercial loan, is a short-term financial agreement between a business and a lender, usually used for the purpose of operational costs or capital expenses.
How it works: Businesses must use a property, equipment, or future accounts receivable as collateral. However, using the latter as collateral is risky, as the lender will be forced to take money directly from your customers if you default on your loan.
Unlike secured loans, unsecured loans don’t require any collateral, and are the ideal solution if you have a steady salary. Also called signature loans or personal loans, the interest rate and borrowed amount is based on your income and credit history.
Below are the most widely used type of unsecured loans:
Small Business Loans
Small businesses have very little assets to use as collateral, which is why most financial institutions and private lenders offer unsecured loans to small business owners. Usually, all a business must provide are a good credit score and proof of business experience.
A small business may run into some difficulty securing a loan from a bank because there is a high probability of the operation folding in the first year of business. Private lenders, however, are a great alternative and offer flexible repayment plans.
Payday loans such as those offered by icash are ideal in emergency situations (i.e. home or car repairs, or even fees you can’t cover until your next payday). They are short-term loans that cover your expenses until your next paycheck. While convenient, they normally involve high interest rates.
Remember, there is a loan for every situation. But before you apply for any type of loan, we strongly advise you to do your research. Once you’ve gathered all your information, you’re ready to apply!