What types of loans are there?


If you are in need of funds, you may be wondering what type of loan is out there. To help you sort through the options, we’ve put together several sample loans, including auto loans, personal loans, student loans, and mortgages.

Read on to learn more about the different types of loans and which one is right for your financial needs:

Open loans vs closed loans

Indefinite loans, such as credit cards, offer revolving credit, which means debt can be added to the loan as needed. By comparison, loans of a predetermined amount, such as auto loans, are considered closed loans.

Loans for an indefinite period

Examples: personal lines of credit and credit cards

Open ended loans give you the flexibility to borrow as much or as little money as you want, up to a certain amount, and then pay back some or all of the funds monthly. There is no end date for this type of loan; it will always be open for you.

The advantage of an indefinite loan is that you will be able to use exactly as much money as you need when you need it. This can be useful if, for example, you are temporarily short of funds. The downside is that if you only make the minimum payments, interest can accumulate.

Beware of open-ended loans with a variable interest rate, which fluctuates depending on the market. This can add a considerable sum to your payments if interest rates rise during the life of the loan. You can find more information on variable rates below.

Closed loans

Examples: auto loans, student loans and mortgages

Closed loans are probably what you think of when you imagine a traditional loan. You borrow money for a specific purpose, like paying for a car or a house, and then make monthly payments until it’s paid off.

Closed loans are installment loans. When you borrow money, you make installment payments until the loan is paid off in full. You could have a five-year car loan or a 30-year mortgage – both come to an end.

Open-ended loans are clear because you know exactly how much you are going to borrow and when you will have it paid off. Once the loan is paid off, you have kept your end of the bargain. And if you need to borrow the money, you will need to get another loan, which can be expensive with assembly costs.

Fixed rate loans vs variable rate loans

A variable rate is an interest rate that fluctuates over the life of a loan depending on market conditions. A fixed rate means that your interest rate never changes, no matter how the market moves.

You have the possibility to choose a fixed or variable rate, depending on the lender and the type of loan.

Fixed rate loans

Examples: federal student loans and some personal loans, car loans and mortgages

If you have a federal student loan, it will have a fixed interest rate. Congress determine these rates annually.

You can also get a fixed rate mortgage, which means that the interest rate will not change during the term of your mortgage. This can be useful if interest rates are low but you expect them to increase in the future.

Variable rate loans

Examples: some private student loans, personal loans, auto loans and mortgages

If you get a variable interest loan, that means your payments fluctuate based on an underlying index rate that tracks the market.

Secured loans vs unsecured loans

When you apply for a secured loan, you offer something as collateral if you can’t repay your loan. If you default on the loan, a creditor could seize your property.

For an unsecured loan, you don’t have to provide collateral for the debt, which means if you can’t pay it off, it will be. enter the collections and will increase your credit score.

Secured loans

Examples: mortgages and auto loans

When you take out a car loan or get a mortgage, you get a secured loan. It’s easier to get because the collateral you put in place secures your loan.

If you fall behind on your payments, your car could be repossessed or your house could be foreclosed. Secured loans sometimes have lower interest rates because if you can’t pay off your loan, lenders have a way to recoup at least part of the cost.

Unsecured loans

Example: student loans and most personal loans

Student loans are unsecured loans because you don’t have to provide collateral to borrow them. Personal loans you use for anything that you want are usually unsecured loans as well.

These do not require any collateral and are based on your credit score and income. You can use the loan however you want, but you may have a harder time getting one if your credit history is not good.

Because there is no collateral, unsecured loans tend to have higher APRs.

6 common types of loans

There are many types of loans that fall under the categories described above. Here are some examples of loans that you could use at one time or another.

1. Student loans
2. Auto loans
3. Mortgages
4. Home equity loans
5. Personal loans
6. Refinancing and Consolidation Loans

1. Student loans

These unsecured loans are intended for education expenses although the borrower can choose exactly how to spend the funds. Federal student loans are allocated to you based on your financial needs.

If you don’t have enough money to pay for your education even after federal student loans, you can take out private student loans, but be sure to compare lenders to see which offers the lowest interest rates and the best repayment terms.

2. Auto loans

Whether you buy or car rental, an auto loan helps you pay off if you can’t afford a full cash payment. These are secured loans, which means that if you don’t pay off your loan with minimum payments each month, your car could be repossessed.

Your interest rate depends on your credit score. If you don’t have good credit, you might need a co-signer for your car loan.

3. Mortgages

Unless you can pay the full cost of a house up front, you need a mortgage. It is a type of secured loan that banks offer, usually with a low interest rate. If you can’t pay your mortgage payments and you fall behind, you could lose your property.

4. Home equity loans

The equity in your home is the amount of the value of your home that you own. In other words, it’s the total value minus anything you owe a bank or other creditor.

You can usually borrow up to 85% of the equity in your home. People can use home equity loans for almost anything, but your home is used as collateral if you can’t pay off your loan. This means that it could go into foreclosure if you fall behind on payments.

5. Personal loans

Personal loans may be a good option if you need the money. Whether you are trying to pay off high interest credit card debt or stay up to date on your bills, there are many things you can use personal loans for. As with any financial decision, however, you will want to shop and think carefully about your decision.

Unsecured personal loans are more difficult to obtain because they require a good credit rating. Payday loans are considered personal loans, but they should be avoided as they are short term loans with high interest rates. If you can’t pay it back before your next payday, not getting a payday loan.

6. Refinancing and Consolidation Loans

If you have many different student loans, you might consider refinancing or consolidating them. This allows you to streamline your debt into one easy to manage monthly payment.

Consolidation takes all of your applicable debts and turns them into one loan, usually at a weighted average interest rate. You can consolidate your federal student loans, for example.

Loan refinancing replaces one or more loans with a new one, often with a lower interest rate, a longer repayment term, or both. If you’re struggling to pay off high-interest student loans, credit card debt, or your mortgage, you might consider refinance these loans.

How to find a loan that’s right for you

Now that you know the different types of loans, you can browse through all of your options to find the one that best suits your situation.

From secure or unsecured to variable or fixed, there are a lot of choices. The next step is to compare lenders and other options to get good repayment terms for your budget and low interest rates.

Rebecca Safier contributed to this report.