5 Common Loan Types And How They Work

Loans are something we have considered once or twice in our life. Loans could be taken for several reasons; to get a new car, to see one through college, or simply to get new equipment for your workplace.

Loans are usually gotten for banks, credit unions, or lenders, but in some cases also from family and friends. However, some loans are more common than others, below are five common loans and how they work:

1. Debt Consolidation Loans: Debt consolidation loans are frankly a larger loan amount taken to offset other smaller loans. It is usually repaid with monthly payments, meaning a lower feel is paid each month, but larger interest rates overall. It is also a form of unsecured loan, wherein there is no collateral.

2. Personal Loans: Personal loans could be taken out for a number of reasons. It might be to get a new car or move to a new apartment. It is usually repaid with a lower interest than an unsecured loan.

However, you would have to reach a satisfactory credit score for you to be able to apply, and there is a real possibility of losing assets used as collateral when you fail to repay the loan.

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3. Home Equity Loans: Home equity loans are applicable when the value of the house is greater than the loan being asked for by the borrower. The loan is then placed against the equity of the house. It usually used for big projects such as a home renovation or the addition of an extra wing.

Home equity loans involve two forms; a home equity loan and a home equity line of credit. A home equity loan is usually between 5-10 years and is paid at a fixed rate every month. It is also expected to be paid in lump unlike a home equity line of credit. Home equity line of credit usually lasts from 15 to 30 years and has a flexible rate through the loan period.

4. Student Loans: Student loans are loans taken out to help students through universities. They are usually of low interest, ranging from as low as 0% to 14.5%. The loan repayment life is usually between 10-25 years, and in some cases longer.

Student loans could either be granted by federal institutions or private institutions. While federal institutions grant a lower interest rate and have an option to forgive a debt, private institutions charge more interest and don’t have an option to forego a loan.

5. Mortgage: Mortgage loans are taken by borrowers to be able to afford a house. It is a secured loan, because the bank, credit union, or lender can repossess the house in the presence of a default on payment on the part of the borrower. They have low-interest rates of about 2.5% to 4.5%. The higher your credit score, the likelihood of getting a lower interest on your loan.


Whether you are taking a loan to get a new home or to see yourself through school, understanding the type of loan and how it works will help you make the right decision and plan towards repayment.

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