Loan

A loan is a sum of money that is lent to another party in exchange for repayment in the future. The party borrowing the money (known as the “borrower”) incurs a debt, which they have to pay back before a certain date. This includes the principal, which is the original borrowed amount, and any added interest.

Loans are usually given by banks and other financial institutions to individuals, small businesses, corporations, governments and other entities. The party advancing the sum of money, is usually known as a “lender”. In certain cases, the lender may also ask for collateral to help secure the loan.

Find out how loans function in our quick explainer guide below.

What Is a Credit Score?

A credit score is a number between 300-850 that represents a consumer’s creditworthiness. This number is used by lenders as part of their decision-making process when approving or denying loans.

Credit scores are based on credit history, which includes factors such as repayment history, total debt, and number of open accounts. Although every creditor can set their own ranges for credit scores, the average FICO score range is most often utilized.

• 800 to 850: Excellent
• 740 to 799: Very good
• 670 to 739: Good
• 580 to 669: Fair
• 300 to 579: Poor

5 Common Types of Loans

Loans can be either secured or unsecured; a secured loan is a loan backed by collateral. On the other hand, an unsecured loan does not require collateral. This usually means that they have higher rates than secured loans due to being riskier for lenders.

There can also be further differences in the type of interest rates that a loan offers. For example, fixed rate loans have interest rates that don’t change during the loan term, while variable rate loans offer interest rates that change based on underlying benchmarks or indexes.

Below are 5 of the most common types of loans.

Mortgages and home buying loans

Mortgages are long-term loans that are given to help people and businesses purchase land and real estate. This is secured against the value of the property itself, creating a lien on the asset.

• Term length: 15 - 30 years
• Interest rate: 2% - 6%

Student loans and higher education financing

Student loans are given to individuals pursuing higher education, which can be paid back in the long-term. 2 kinds of student loans exist, federal loans which are provided by the US government, and private student loans which are provided by banks.

• Term length: 10 - 25 years
• Interest rate: 4% - 14%

Auto Loans and Vehicle Lending

Auto loans are medium-term loans that allow individuals to secure the funds necessary to buy a car. These can be used to finance any kind of vehicle purchase, including boats, motorcycles, or trucks. Like mortgages, these are secured by a lien against the asset being bought.

• Term length: 1 - 7 years
• Interest rate: 3% - 6%

Small Business Loans and Other Start-up Options

Small business loans are provided by the federal government and other lenders. They can provide up to $5 million in funds to help entrepreneurs set up a company or expand on their current offering. The Small Business Administration is the main source of much of this funding and this kind of borrowing can be paid off in the medium-to-long term as required.

• Term length: 5 - 25 years
• Interest rate: 4% - 13%

Personal Loans

Personal loans come in all shapes and sizes. They are shorter-term in nature than other kinds of financing and can be used for almost any reason as long as the borrower can demonstrate a good enough credit score and/or by providing sufficient collateral.

• Term length: 1 - 5 years
• Interest rate: 6% - 36%

Other Types of Loans

There are other loans you may consider, which could be secured or unsecured. It’s important to know what they are used for, and the risks involved, especially for unsecured loans.

Signature loan

A signature loan is a personal loan that can be given based on your character, income, or personal credit history. These allow a borrower to get funds without having to put up their assets as collateral.

These loans are named from the fact that you are being granted alone on the basis of your reputation or written signature. They are also known by the following names:

• Character loans
• Good faith loans

Unlike secured loans, signature loans are unsecured, and potential borrowers must be aware of certain risks associated with these loans.

Some of the risks that come with a signature loan include:

High interest rates

Unsecured loans like signature loans have high interest rates, which poses the most significant risk. If you plan on taking out a signature loan, make sure you check the annual percentage rate (APR) and make a comparison before committing.

Credit score problems

When your credit is bad, secured personal loans usually come in handy to boost your chances of getting a better interest rate. Both unsecured and secured loans can negatively affect your credit history if you don't make your monthly payments consistently.

Home equity loans

A home equity loan is a form of consumer debt that allows a homeowner to borrow money against their home’s equity.

Also known as a second mortgage, a home equity loan agreement is based on the difference between the property’s current market value and the owner’s current mortgage balance.

There are two types of home equity loans: fixed-rate loans and home equity lines of credit (HELOCs), which have variable rates.

The basic requirements for home equity loans include:

• Owner equity that exceeds 20 percent of the home’s value
• Verifiable income history for a minimum of two years
• A credit score of at least 600

A homeowner typically is allowed to borrow an amount that is based in part on a combined loan-to-value ratio of 80 to 90 percent of the home’s current appraised value. Other home equity loan requirements can vary from lender to lender.

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