16 Types of Loans to Help You Make Important Purchases – Forbes Advisor
Itâs always a good idea to save up money before making a large purchase. But in reality, thatâs not always possible. Thatâs especially true for expenses like a college education, a car or a home, or even unexpected emergencies, like medical bills.
When you canât save money in advance, you can take out a loan. However, youâll need to understand what type of loan to shop for because there are specific loans for certain purchases.
Here are 16 types of loans that can help you make necessary purchases in your life:
1. Personal Loans
Personal loans are the broadest type of loan category and typically have repayment terms between 24 and 84 months. They can be used for just about anything except for a college education or illegal activities. People commonly use personal loans for things like:
- Medical treatment
- Home renovations
- Debt consolidation
- Relocating to a new city
- Computers or other pricey electronics
Personal loans generally come in two forms: secured and unsecured. Secured loans are backed by collateralâsuch as a savings account or a vehicleâthat a lender can take back if you donât repay your full loan amount.
Unsecured loans, on the other hand, require no collateral and are backed by your signature alone, hence their alternate name: signature loans. Unsecured loans tend to be more expensive and require better credit because the lender takes on more risk.
Applying for a personal loan is easy, and typically can be done online through a bank, credit union or online lender. Borrowers with excellent credit can qualify for the best personal loans, which come with low interest rates and a range of repayment options.
2. Auto Loans
Auto loans are a type of secured loan that you can use to buy a vehicle with repayment terms between three to seven years. In this case, the collateral for the loan is the vehicle itself. If you donât pay, the lender will repossess the car.
You can typically get auto loans from credit unions, banks, online lenders and even car dealerships. Some car dealerships have a financing department where they help you find the best loan from partner lenders. Others operate as âbuy-here-pay-hereâ lenders, where the dealership itself gives you the loan. These tend to be much more expensive, though.
3. Student Loans
Student loans are meant to pay for tuition, fees and living expenses at accredited schools. This means that you generally canât use student loans to pay for specific types of education, such as coding bootcamps or informal classes.
There are two types of student loans: federal and private. You get federal student loans by filling out the Free Application for Federal Student Aid (FAFSA) and working with your schoolâs financial aid department. Federal student loans generally come with more protections and benefits but charge slightly higher interest rates. Private student loans come with much fewer protections and benefits, but if your credit is good, you could qualify for better rates.
4. Mortgage Loans
Mortgages help you finance the purchase of a home, and there are many types of mortgages available. Banks and credit unions are common mortgage lenders; however, they may sell their loans to a federally-sponsored group like Fannie Mae or Freddie Mac if itâs a qualified mortgage.
There are also government-backed loan programs available for certain groups of people, including:
- USDA loans for rural, low-income homebuyers.
- FHA loans for people with low- to moderate-income levels.
- VA loans for active-duty servicemembers and veterans.
5. Home Equity Loans
If you have equity in your home, you might be able to use a home equity loan, also known as a second mortgage. The equity you have in your homeâthe portion of your home that you own, and not the bankâsecures the loan. You can typically borrow up to 85% of your homeâs equity, which is paid out as a lump sum amount and repaid over five to 30 years.
To find out your homeâs equity, simply subtract your mortgage balance from your homeâs assessed value. For example, if you owe $150,000 on your mortgage and your home is worth $250,000, then your equity is $100,000. Considering the 85% loan limit rule, and depending on your lender, you could potentially borrow up to $85,000 with $100,000 in equity.
6. Credit-builder Loans
Credit-builder loans are small, short-term loans that are taken out to help you build credit. Since theyâre marketed toward people with zero or limited credit, you donât need good credit to qualify, unlike regular loans. You can typically find credit-builder loans at credit unions, community banks, Community Development Financial Institutions (CDFIs), lending circles or online lenders.
Instead of receiving the loan funds up front as you would on a traditional loan, you make fixed monthly payments and receive the money back at the end of the loan term. Credit-builder loans typically range between $300 to $3,000 and charge annual percentage rates (APRs) between 6% and 16%.
Credit-builder loans can be a very affordable and safe way to start building credit, especially for young people. If you put your payments on auto-pay, for example, youâll never have to worry about making your payments and you can build credit entirely on auto-pilot.
7. Debt Consolidation Loans
Debt consolidation lets you streamline your payments by applying for a new loan to pay off your other debts, therefore leaving you with only one monthly loan payment. If you have high-interest debts like credit cards or a high-interest personal loan, a debt consolidation loan can help you in two ways. First, you could qualify for a lower monthly payment. Second, you could qualify for lower rates, which can help you save money over the long term.
In order to get a debt consolidation loan that improves your payments, though, youâll need to first shop around for a lower rate than your current loan or credit card. Youâre also more likely to qualify if your credit has improved since you took out your current loan or card. Once you qualify, your lender may automatically pay the debts for you, or you will need to do it yourself.
8. Payday Loans
Payday loans are a type of short-term loan, usually lasting just until your next paycheck. These loans arenât credit-based, and so you donât need good credit to qualify. However, these loans are often predatory in nature, for a couple of reasons.
First, they charge very high finance fees, which can work out to around 400% APR in some cases (the finance fee isnât the same thing as an APR). Second, they allow you to roll over your loan if you canât pay it off by your next paycheck. It sounds helpful at firstâuntil you realize even more fees are tacked on, which trap a lot of people in debt obligations that can be higher than what they originally borrowed.
9. Small Business Loans
There are several types of small business loans, including Small Business Administration (SBA) loans, working capital loans, term loans and equipment loans. These loans help small businesses, typically companies with up to 300 employees, fund their operations. Local businessesâlike landscapers, hair salons, restaurants or family-owned grocersâand sole proprietorsâsuch as freelancers who still have a traditional day jobâalso can apply.
Small business loans typically have more qualification requirements than personal loans, especially if youâre applying for an SBA loan. However, the rewards are well worth it because these loans can give your business the financing it needs to grow. Alternative business financing methods, like invoice factoring or merchant cash advances, may be more costly, leaving small business loans as the best option for business financing.
10. Title Loans
Title loans are another type of secured loan where you pledge the title for a vehicle you ownâsuch as a car, truck or RVâas collateral. Your loan limit typically is anywhere between 25% to 50% of your carâs value, evaluated by the lender. Lenders that offer title loans also charge a monthly fee of 25% of the loan amount, which translates to an annual percentage rate (APR) of at least 300%, making these a costly financing option.
These loans are different from traditional auto or RV loans for a few reasons:
- They charge very high rates.
- You give the title to the lender as collateral for the loan.
- Theyâre short-term loans, typically up to 30 days.
Thus, title loans generally fall in the same category as payday loans: theyâre very expensive, short-term, small-dollar loans that are often considered predatory.
11. Pawnshop Loans
Pawnshop loans are another type of loan we usually donât recommend because theyâre very expensive, have small loan limits and require quick repayment. To get a pawnshop loan, youâll bring something of value to the pawnbroker, such as a power tool, a piece of jewelry or a musical instrument.
The pawnbroker will assess the item, and if they offer you a loan, itâll typically be worth 25% to 60% of the itemâs resale value. Youâll receive a pawn ticket, which youâll need when you return to repay the loan, typically within 30 days. If you donât return, or if you lose your ticket, the pawnbroker gets to keep your item to resell and recoup their money.
12. Boat Loans
Boat loans are specifically designed to finance the purchase of a boat and are available through banks, credit unions and online lenders. The loans can either be unsecured or secured, with secured loans using your boat as collateral. As with any vehicle-related loan, itâs crucial to keep depreciation in mind.
Boats and other vehicles lose value over time, especially if you buy a new boat. If you choose a long-term loan, donât make a very large down payment and/or sell your boat soon after you buy it, itâs possible to owe more on the loan than you can sell it for. This means youâll need to keep paying off the loan even after you sell the boat, and thatâs not an enviable position to be in.
13. Recreational Vehicle (RV) Loans
RV loans can either be unsecured or secured loans. Smaller RV loans are typically unsecured and work similarly to a personal loan while expensive, luxury RVs are securedâwith the RV serving as collateralâand work more like an auto loan.
Depending on the lender, you can find RV loans for around $25,000 that you repay over a few years, but you also can find loans up to $300,000 that you repay over 20 years.
RVs are fun and they can help you and your family enjoy quality time together. But itâs important to keep depreciation in mind, especially if youâre buying a new RV and you think youâll be selling it at some point down the line.
14. Family Loans
Family loans are informal loans that you get from family members (and sometimes friends). You may choose to turn to family if you canât qualify for a traditional loan from a bank or lender, for example.
Family loans can be useful because you donât need any credit to get one. If your family member trusts you and they have the financial means to do so, they can choose to give you the loan.
But that doesnât mean you should take advantage of your family memberâs generosity. Itâs still a good idea to draft up and sign a loan agreement, including interest payments, due dates, late fees or other consequences for non-payment. You can find draft agreements and payment calculators online to help you do this.
15. Land Loans
There are a lot of reasons people buy land. Maybe they want to build a house on it, harvest its natural resources or lease it out to other people and businesses. But land can be expensive, and thatâs where a land loan can come in handy.
Land loans generally come in two forms: improved and unimproved land loans. Improved land loans are for plots that are ready to build on. For example, they might have a well and septic tank already installed, power lines or a driveway. Unimproved land loans, on the other hand, are for a plot of vacant land, which may or may not be easy to access.
If you choose to take out a land loan, you can expect to have higher interest rates and more strict down payments and credit requirements than other property loans because theyâre a more risky transaction for a lender.
16. Pool Loans
Unless youâre buying an inflatable kiddie pool, chances are youâll need to take out a loan if you want to add a pool to your property. Pools can run anywhere from $3,000 up to $100,000 or more depending on how fancy you want to go, according to Fixr.
Just like with RVs, boats and other lifestyle loans, itâs a good idea to consider the resale value of your house if you add a pool onto it. Not everyone wants to own a pool, so if you plan on selling your house in the future, you could be limiting the number of people who want to buy your home.
Alternative Financing Options
Weâve talked about a lot of the different types of loans you can get. But if you need to borrow cash, you have other financing options beyond loans, including:
- Credit cards. Credit cards are an easy way to pay for all but the largest purchases, and may even come with rewards for specific expenses.
- Line of credit. You can get a line of credit from your bank or credit union. You can even get secured credit, such as a home equity line of credit (HELOCs).
- Gift. If you have a wealthier friend or family member and you donât mind schmoozing them up, you can sometimes get the cash you need that way. Many parents save for their childâs college education or even down payments on a home, for example.