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April 12, 2022
Texas_Fort Hood payday loans

Types of Loans: What are the Differences?

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Consumers commonly take on loans to finance home purchases, education, debt consolidation and general living expenses. For the growing small business, loans are available for working capital, equipment, real estate, expansion, and inventory purposes. In short, there’s a wide variety of options available on the loan market, so it’s important to research what type of debt obligation will work for you. Below, you can find a breakdown of each loan type and how it will affect your finances.

Consumer Loan Types

The most common consumer loans come in the form of installment loans. These types of loans are dispensed by a lender in one lump sum, and then paid back over time in what are usually monthly payments. The most popular consumer installment loan products are mortgages, student loans, auto loans and personal loans. In general, lenders use consumer’s credit score and debt to income ratio to determine the interest rate and loan amount for which they are qualified.

  • Up to $424,100 for conforming loans
  • Above $424,100 for jumbo loans
  • 500 for 10% down payments
  • 580 for 3.5% down payment
  • 620 for fixed-rate
  • 640 for adjustable-rate

Student Loans

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Most student loan borrowers opt to take out federal student loans, which have fixed interest rates and don’t have to be repaid until a few months after graduation. The two main types of federal student loans are subsidized loans and unsubsidized loans. The subsidized version is meant for students with the highest financial need, as the government makes interest payments on the loan while the student is still in school.

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15 or 30 years Secured
Student Loans
  • Up to $12,500 annually for federal undergrad loan
  • Varies for private loans
Varies depending on borrower’s debt and post-grad income Unsecured
Auto Loans Usually up to $100,000 2 to 7 years Typically secured
Personal Loans
  • $25,000 to $50,000 for unsecured loans
  • Up to $250,000 for secured loans
Usually up to 10 years Both

Installment loans can come as either secured or unsecured. Secured loans are backed by collateral, meaning that the lender can seize the borrower’s collateralized asset if the loan isn’t paid back. Unsecured loans are not secured by collateral, and lenders have a more difficult time recouping their losses for these loans if a borrower defaults. In general, larger loans and specific purchase loans like mortgages and auto loans are secured.

Mortgages

Mortgages are used by consumers to finance home purchases. Because most homes cost much more than the average person makes in a year, mortgages are designed to make homebuying accessible by spreading out the cost over many years. The most common home loan is the 30 year fixed-rate mortgage. This loan is repaid in fixed monthly installments over the course of 30 years in a process called amortization. Mortgages with term lengths of 15 or 20 years are also offered, but are far less common-as their monthly payment is much higher than the 30 year variety.

Mortgage programs also differ depending on which agency sponsors them. There are three main types of mortgages: conventional mortgages, which are backed by Fannie Mae and Freddie Mac; FHA loans, which are designed for low income or credit poor individuals and are backed by the Federal Housing Administration; and VA loans, which are for veterans and are backed by the Department of Veterans Affairs. FHA loans are good for people who want to make a lower down payment , while conventional mortgages are more affordable for those who make a down payment over 20%.

Mortgage Insurance None Upfront and annual premium for the life of the loan Paid until 20% equity is reached
Minimum Down Payment None required 3.5% of home value required 3% of home value for most qualified borrowers
Credit Score Minimum Varies by applicant
 

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