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Aug 17, 2020

4 Types of Loans

Sometimes, you just don't have the funds to pay for something you really need. Almost everyone is familiar with credit cards, auto loans and mortgages, but there are all kinds of loans out there that cater to specific situations or needs. These four loan types are only a few.

1. Personal Loans

A personal loan is very versatile. You don't need collateral to apply for one like you would for an auto loan, and you can use the loan for a wide range of expenses, from home renovations to an engagement ring.

This type of loan works best for someone with a good credit score because you're more likely to get approved and receive a lower interest rate. You can apply for a personal loan with most credit unions and banks, and with some online lenders.

2. Home Equity Loans

If you own a home, you can get a home equity loan by borrowing against the equity, or the amount of your home you own. If you've paid off a third of your mortgage, you can borrow up to a third of your home's value. People who opt for this type of loan are usually doing something to improve the quality of their home, like renovating the kitchen or building an addition.

Home equity loans tend to have lower interest rates than some other types, but like with a mortgage or auto loan, there is collateral involved. In this case, your house. Collateral can be a risk because if you default on your loan, you could lose your home.

3. Student Loans

These loans are increasingly common in the United States. Most college graduates can expect to carry roughly $40,000 in student loan debt, at least. Many people today include student loan payments in their budgets, along with more traditional bills like rent and utilities.

Since 2006, all federal student loans have fixed interest rates. Every student applying to colleges should fill out a FAFSA (Free Application for Student Aid). This application provides the government with the information needed to award federal loans and even grants based on the student's financial need. There are also private student loans available through institutions like banks.

4. Debt Consolidation Loans

A debt consolidation loan is a way to provide debt relief. This type of loan merges various bills into one debt that you can repay as one bill, to one lender. This type of loan is best for things like paying off credit cards, which typically have higher interest rates. If you decide to take out a debt consolidation loan, it's important to figure out the total you must pay for all the bills you want to merge and compare it against your budget. A lender can then help you figure out the best plan and interest rate to pay off your bill. Typically, the repayment period is about 3 to 5 years.

These are only some of the different loan types available. One of them might work for you, or another type all together might fit your needs better. It's important to do your research when considering a loan.
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