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The average American carries about $38,000 in personal debt — not including their home mortgage.
What form does all this debt take? There are many different types of loans. Let’s learn about some of them here.
1. Auto Loans
As the name implies, you can take out an auto loan to pay for a car. It is considered a secured loan as the car is automatically put up for collateral. This means that if you stop making payments, the lender can seize the vehicle.
There are various sources from which you can get a loan including:
- Credit unions
- Car dealerships
Banks and credit unions tend to have better terms. However, sometimes, dealerships will offer manufacturer-sponsored low-interest incentive loans valid only for certain vehicles.
2. Personal Loans
What if you need money for something that isn’t tangible? Maybe you want to help pay for your wedding or need to pay for an unexpected car repair or other emergency expenses.
In that case, you can take out a personal loan. You have freedom to spend it on whatever you choose, but that freedom comes with a price you’ll pay in a higher interest rate. However, you can get a lower rate by having a good score and a strong credit history.
3. Credit Cards
Credit cards are a handy form of debt. Once you’ve been approved for a card, you can borrow money whenever you like — up to the limit established by your lender. Each month you’re required to pay at least a minimum payment. If you can pay it in full each month, you don’t even have to pay interest!
However, this convenience comes with a price, credit card debt carries some of the highest interest rates in the finance world.
4. Cash Advances
A credit card can only be used to pay for goods or services, but what if you need cash? Many cards will allow you to take out a cash advance, a short-term loan from your credit card. The fees are typically higher but cash advances can be a good option in an emergency.
You can also take a cash advance as a short-term loan against your future income. Commonly known as “payday” loans, they are great for small sum emergencies that you typically pay back with your next paycheck or two.
5. Small Business Loans
Looking to start up a business? Small business loans can provide you with the capital you need to get started. Or, if your business is already running, the capital you need to make improvements or expand.
In order to qualify, you must submit a business plan to be approved by the lender. Additionally, you may be required to put up personal assets as collateral for the loan.
Different Types of Loans for Different Situations
This is only a quick sampling of the many different types of loans that are available.
Always borrow money responsibly and have a plan for paying it back. While loans can be very useful and help people achieve their dreams or pay for unexpected expenses, they can also wreak havoc and leave people in financial ruin.
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