Understanding the Various Loans Available to You

Nearly everyone needs to take out a loan at some point in their life and assume debt to live comfortably or invest for the future. Yet, there are many different types of loans to choose from based on your financial needs. Additionally, other loan types are associated with varying interest rates, eligibility criteria, and terms, depending on the lender and your creditworthiness.

If you understand the various loan types, you can make informed decisions when it’s time to make a significant purchase or address an emergency. In this Tower Loan article, we explore the basics of loans and types of loans to help you choose the right loan for your unique financial situation.

Loan Basics – How Different Types of Loans Work 

Before diving into the different types of loans, let’s examine how loans work and the common loan categories you’ll encounter.

Secured and Unsecured Loans

If you take out a secured loan, it will be backed by collateral, such as your home, vehicle, or savings account. Since a secured loan requires less risk for a lender, you can often get approved for one more easily and secure lower interest rates.

Meanwhile, unsecured loans don’t require collateral and come with a higher risk for lenders. For this reason, you’ll often pay a higher interest rate and be subject to stricter credit requirements for loan approval.

Installment and Revolving Credit

An installment loan features a fixed amount you borrow, which you must repay in regular monthly installments until the balance is paid in full. Student loans, personal loans, auto loans, and mortgages are examples of installment loans.

An alternative is resolving credit, which is a more open-ended borrowing arrangement. With revolving credit, you can borrow as much as you want up to a specified limit. Then, you can make payments on the debt and borrow again. Examples of revolving credit include credit cards and home equity lines of credit (HELOCs). 

Fixed and Variable Interest Rates

Another fundamental concept to understand about loans is the distinction between fixed and variable interest rates.

Fixed-rate loans allow you to lock in an interest rate for the duration of your loan. The benefit here is you are on a predictable payment schedule and consistent with monthly budgeting. However, variable-rate loans fluctuate with market rates and can be riskier. There’s no definitive way to predict whether your interest rate will increase or decrease over time if you have a variable-rate loan.

Popular Loan Types to Know

Among the different loan types, these are the most common loans people choose when they need financial assistance.

1. Personal Loans

Personal loans, like the ones we offer at Tower Loan, are flexible installment loans you can use for any reasonable purpose. Many people use them to pay for home projects, medical bills, weddings, funerals, and to consolidate debt.

Personal loans are typically unsecured loans; however, secured options are available from some lenders. The terms of personal loans can range from just a few months to several years.

2. Auto Loans

When it’s time to buy a new car, you secure an auto loan for the vehicle you are financing. Typical repayment terms for an auto loan range from 36 to 72 months. You can find longer terms to pay off your auto loan and reduce your monthly payments; however, your overall interest will increase with this approach.

3. Student Loans

To pay for your education, you may consider taking out a federal loan which comes with a fixed interest rate, a flexible repayment plan, and forgiveness options. If you don’t qualify for federal loans or need additional support, private loans can be a helpful option, especially if you have strong credit or a cosigner.

4. Mortgage Loans

Most people who buy a house get a mortgage, which is a loan secured by the home they’re buying. These types of loans are typically accompanied by long repayment periods, usually ranging from 10 to 30 years.

VA, FHA, USDA, conventional, and jumbo loans are all loan categories under the umbrella of mortgages. As a borrower, you can choose between a fixed or adjustable rate mortgage.

5. Home Equity Loans and HELOCs

Among the different types of loans are home equity loans and HELOCs. Home equity loans feature fixed payments and a lump sum borrowing amount.

Meanwhile, HELOCs typically feature a revolving credit line with a draw period at a variable interest rate. Both of these loan options use your home’s equity as collateral if you fail to make payments according to the terms.

6. Business Loans

If you’re launching a new business, you may want to consider a business loan for start-up capital. Business loans can also be helpful if you’re expanding your business or need additional funds for payroll.

Types of lending for businesses include traditional bank loans, Small Business Administration (SBA) loans, and business lines of credit. Depending on the lender you choose, you may have the option of a secured or unsecured business loan.

7. Debt Consolidation Loans

Individuals also take out various loans to consolidate debts, combining multiple debts into a single one. Debt consolidation loans are ideal financial solutions when the interest rate for your new loan is lower than that of your current debts. By reducing your credit utilization ratio through a debt consolidation loan, you can improve your credit score over time.

8. Credit-Builder Loans

Some lenders offer credit-builder loans helping individuals initially build or repair their less-than-perfect credit. Credit-builder loans require borrowers to make payments first and then receive the funds after repayment. This financial tool can help you establish a positive credit history by making on-time monthly payments.

9. Payday Loans

Another one of the different loan types is the payday loan, which is generally a loan to avoid if possible. These short-term loans are due by the time you receive the next paycheck from your job.

Payday loans come with extremely high interest rates – often 300% to 400% or more. There is a high risk of falling into a cycle of debt when you rely on payday loans to meet financial obligations.

10. Title Loans

Another one of the loan categories to generally avoid is the title loan. When you get a title loan, you secure your financial commitment with your car title.

Title loans also come with very high fees and short repayment periods. If you can’t repay your loan in time, you may lose your vehicle. Without your car, you may not be able to get to work and earn an income, which is essential for achieving a stable financial position.

Types of Lending with the Lowest Interest Rates

When comparing the different types of loans, many people wonder which loans come with the best interest rates. For example, mortgages typically have the lowest average interest rates because they are long-term loans and use a home as collateral.

Federal student loans also have lower interest rates because they are fixed loans with government-backed rates. Personal loan interest rates vary widely based on your credit factors, and auto loans also have a wide range of rates based on your credit and the value of your vehicle.

However, payday and title loans come with the highest interest rates, which means you’ll lose more money over time by getting these loans over the other options.

How to Choose the Right Loan Types for Your Needs

Now you can understand the basics of loans and types of loans available, we hope you’re in a better position to decide which loan is right for you. The first step in selecting a loan is to consider its specific purpose, such as whether you need money for a vehicle, a home, educational costs, or an emergency.

Understand what your credit score and debt-to-income ratio are so you can compare your options. A fixed-rate or variable-rate loan may be best for you, depending on your situation. Read the fine print about repayment flexibility and potential penalties on any loan you are considering. Always compare options offered by multiple lenders before committing to a new loan.

If a personal installment loan feels like the right fit, Tower Loan is here to help. Our loans provide quick, flexible solutions to life’s challenges and offer an easy online application process.

We have offices in many cities across the United States and likely have a convenient location near you. You can also manage your loan anytime, anywhere with the Tower Loan Mobile App—making it easy to apply, make payments, or check your balance right from your phone without ever needing to visit an office.