Life gets super expensive, especially when it comes to the bigger essentials, like a roof over your head or a car to get you to work. There are several points in your life when you’re going to need to make a huge purchase, and you’re just not going to have the money. The aforementioned house and car are two of the more notable examples, but it can be anything from medical expenses to education. When these scenarios come to pass and you need the cash to pay the bills, your only real viable option is to get a loan.
A personal loan is a sum of money that you borrow and pay back over a period of time, sometimes months or years, plus interest. You can use the money for anything, so there are no restrictions on it like with a loan designated for a specific purpose.
Conventionally, the loan is taken out for between two to seven years and comes with an interest rate between 6% and 36% APR. Personal loans can be both secured or unsecured depending on the whim of the borrower, but unsecured loans are going to cost you more than a secured one would.
The rates on a personal loan tend to be quite a bit cheaper than credit cards, and you have a higher borrowing limit, so if you’re debating between the two, you’re better off with the loan.
When a lender is deciding how much to charge you for a personal loan or whether to loan you one at all, they’re going to look at your credit score. The better your score, the better your terms will be. It may also affect the type of loan you get offered, with high credit scores having easier access to unsecured loans.
An auto loan is a secured loan, and as you might expect, the car you purchase is typically the collateral on it, meaning that if you don’t pay the money back, the car is going to be repossessed and liquidated. There are two types of auto loans out there for you to use. One is direct; the other is indirect.
A direct loan is the typical scenario of you going to a bank to see about getting a car loan. It is an agreement between a financial lender and the borrower and comes with its own set of terms and conditions.
An indirect loan is technically not a loan, but it functions the same. It’s essentially an installment trade agreement, where you purchase a product with the condition that you pay for it in regular installments rather than one big lump sum. This type of loan is offered by the car dealership you’re going to be buying from, meaning if you’re buying privately, you don’t get this option.
Indirect loans are typically easier to get than direct loans but are also usually more expensive. On top of that, car dealership employees earn commission on these loans, so they’re going to be pushing them on you hard, so take what they say with a pinch of salt.
For those unfamiliar with mortgages, it is the loan you take out when you want to buy a house. So we’re talking six digits here, if not more. It is a secured loan using the house as collateral.
For most people, getting a mortgage is one of the largest events of their life, and signifies that final step to true freedom. It is the largest sum of money many are going to see before their retirement and the most they are ever going to pay in a single transaction.
Essentially, a student loan is the loan one would take out to pay for enrollment at a college or educational institution. The amount varies on a number of conditions, but typically it’s $3,000 dollars per year for three years and $15,000 dollars if you decide to do a master’s degree. Again, there are two types of loans here, subsidized and unsubsidized.
With subsidized loans, the Education Board pays for a portion of the interest on your tuition while you’re in college, provided you’re eligible for it. To get a subsidized loan, you need to prove the financial need for it. Otherwise, you aren’t going to be allowed to receive its benefits.
Unsubsidized loans are easier to get, but you will be responsible for the interest throughout your whole time in school as well. You can combine the two loans in order to get the funds needed to full cover your financial needs.
This loan is shooting off from the tree that is student loans. It is another type of financing for college that can be taken advantage of, just not by you.
A PLUS loan is a type of loan offered to the parents of an undergraduate (someone who doesn’t have a degree yet) to make up the difference in the cost of enrollment. So say the college costs $4,000 dollars to enroll, and you can only get a loan of $3,000 dollars. Your parents can apply for a PLUS loan and get the remaining $1,000 dollars in their name and on their credit. This just lets the banks sleep soundly at night, knowing that the investment it has made in your education is safer with some of the debt not being on your shoulders.
Again, you need to be eligible for this loan, although it isn’t as restrictive as subsidized student loans. The amount that your parents can take out is very limited though, being strictly the difference between the amount you’ve been loaned and the cost of your enrollment.
Debt Consolidation Loan
It’s actually the name for a sort of loan strategy, as opposed to an individual type of loan all by itself. It involves taking out one large singular loan to pay off the rest of your outstanding debt elsewhere. This large loan is typically in the form of a personal loan or a second mortgage.
These are short term and high interest. This type of loan isn’t offered by banks, but by individual payday lenders typically online. The government strongly advises against using this type of loan, and it’s easy to see why. The interest rates on these are extraordinary considering how much you’re borrowing and the time you’re borrowing it for.
It’s a type of loan that is only really used when an emergency pops up in between paydays, like needing to fix the car or go to the doctor. The loan can be alright for those purposes, but try to avoid taking them out regularly; otherwise, you’re going to trap yourself in a debt spiral of living paycheck to paycheck.
Small Business Loans
Here’s a loan for the entrepreneurs out there. A small business loan is pretty self-explanatory. It is a loan granted to budding, up and coming business owners to either get the business off the ground or to expand it. There are several reasons beyond these two that a business owner would get a small business loan, but these two are the most predominant.
The best source of this kind of finance in the states is the U.S. Small Business Association. They offer entrepreneurs all kinds of tailored plans and options depending on their needs, as well as other resources and guidance to help them and their businesses thrive.
A cash advance, in simple terms, is a short term cash loan against your credit card. This is done by either using the card in an ATM or going to a bank directly. You can also get a cash advance by writing a check to a payday lender, but the first option is by far the easiest and the most common.
Home Equity Loan
Here’s a type of loan that relates to a mortgage. Having equity in your home means that the property is valued at a total that is higher than the total you still owe on it. You’re essentially trading in that debt you’ve already cleared, but it can be a great source of income for renovating the house, paying off your student loans, consolidating other loans, starting big projects, or even expanding out into a second property.
There are two types of loans that fall under the home equity banner: home equity loans and home equity lines of credit (HELOC). For both, given that the property is used as collateral, the interest rates are significantly lower than the likes of a credit card.
The two types are fairly similar, with the main difference being that home equity loans have fixed rates of interest and regularly scheduled monthly repayments, whereas HELOCs have variable interest rates and come with flexible repayment plans.
Borrowing from Your Retirement Fund
Borrowing from your retirement account (or your life insurance) might seem oxymoronic, as you’re essentially borrowing from yourself. That’s true to a certain extent. You are borrowing from yourself, so repaying the loan should prove to be much easier and a much smaller source of stress than a loan from an external entity.
At the same time though, given that you have no responsibilities to a third party in regard to the money, you may end up prioritizing other things over repaying the borrowed money. You might think the result of this is just that you end up with less money in the retirement account, but there are actually some pretty hefty tax-related consequences for not repaying this type of loan, so don’t go dipping into your retirement account like there’s no tomorrow.
For veterans of the U.S. military, you actually have an additional option when it comes to applying for a loan. It’s not a particular type of loan per se, but more of a program offered by The Department of Veteran Affairs. The VA vouches for you and signs on with the loan as a cosigner. This gives you access to loans at higher amounts, and with lower interest rates.
Your Credit Score’s Impact
Now that we’ve gotten through all the loans out there, we’ve got to talk a small bit about one of the primary common denominators between most of them, and that’s your credit.
Your credit refers to your financial situation at large, including your current accumulated debt, as well as your financial history, specifically how well you’ve managed to pay off debt in the past.
Your credit report contains all of this information and is available from a few different sources online if you want to have a look. However, it’s not your report that lenders concern themselves with exactly. It’s your credit score.
Your credit score is a mathematically calculated three-digit number derived from your credit report by an AI equation. It allows lenders to instantly see how well you manage your money and debt without having to dive deep into your report and history.
The higher your score is, the better, and the typical score is somewhere in the range of 300-600. You actually have more than one credit score though, for different purposes. For example, if applying for a car loan, a lender may request a score specifically related to that industry and type of finance. However, generally, you score in and around the same number regardless.
You want to start building your credit score as soon as you can, as a nonexistent score renders you just as risky as someone with a bad score. The only real way to do this is to take out loans and pay them back on time. Don’t take out a loan strictly for the purpose of building credit though; the reward is hardly worth the financial hit. Instead, take out loans as you need them, and just make sure that you stay on top of them. If you do that, you can’t really go wrong.
There is one other thing in relation to credit that you need to know, and that’s the possibility of your report being wrong. If you suspect this, request a copy of your report, and scan it for any wrong information.
If you do find something, there are two options you have available to you. The first is to rectify it with the agency that you got the report from. There is a whole process you have to go through here, and you need to have documented proof that the information is false. Alternatively, you could fix it at the source and mail the company that put forward the wrong information. You need the same documents and proof, but it may prevent it from happening again in the future.