What’s your (loan) type?
Explaining borrowing options
November 12, 2013 by Mark Dye
Let’s face it: At some point in our lives we all need to borrow money. It could be for a car, furniture, a home, a family vacation or to consolidate debt. The key is to understand what each loan type, and to know what makes each one unique.
We took the time to outline some of the available loan types out there, though whether or not you qualify will depend on a number of factors including your credit score, borrowing history, particular need, and more.
- Short-term loans—Payday, car title, and tax refund anticipation loans fit into this category, as do pawn shops. These sometimes can have interest rates exceeding 100%, which is why there are very strict rules about offering them to military families (they are essentially off limits). They are usually for people with little to no credit history and in need of money quickly.
- Secured loans—These types of loans require “collateral,” which is something that you own outright (e.g., a car that’s paid for) that you put up against a loan to protect the lender in case of default. The lender then puts on the item what is called a “lien”; basically, the lender has legal right to the property until the debt is paid back; if it isn’t, the lender can then claim possession of the item, or get part or even all of the proceeds if the item is sold. This type of loan is usually for those who have a good, but not great (or maybe not long) credit history, and interest rates can range from 17% to 40%. You can access them from a number of lenders, including some banks, credit unions, and finance companies.
- Unsecured loans—These are for those with “prime” credit, which is usually defined as someone with a credit score of 680 or above. They do not require any type of collateral and, while rates vary, they tend to range from 5% to 15%, depending on amount, lender, and credit score. These are what most would consider traditional bank or credit union personal loans.
- Auto loans—I give these their own category because rates and terms can vary wildly depending on the lender, the borrower, and even the dealer. Interest rates are usually lower than a standard unsecured loan because of dealers’ desire to sell lots of cars, and so range anywhere from 0% on a new car for someone with prime credit, to upwards of 30% for those with poor credit buying a used car. Keep in mind that you’ll usually get a lower rate on a new car, and that the dealer might contact several different lenders when setting up financing. This means that you’ll have an influx of 5-7 inquiries on your credit report afterward which, yes, will negatively affect your score, but not by much.
- Home loans (mortgage)—These are pretty straightforward, as they can only be used for buying a home. Rates tend to be quite low at the time of this writing—lower than 4% in some cases—due to a glut of available housing and efforts to revive the housing market. Lenders offer 10, 15, and 30-year terms depending on price, credit score and other factors. And military families have even more options:
- VA Loan—If you’ve served in the military, you might qualify for one of these no-down-payment mortgages. They are VA-Guaranteed, sometimes offer lower rates than conventional mortgages, and might even have lower credit requirements. So if you’ve served and want to buy a home, there’s a good chance this is the mortgage loan option you’d want to consider first. You can visit our VA Loan page to learn more.
Keep in mind that this is a 50,000-foot-view of your options and, again, which one you best qualify for will depend on a number of factors. But at least you can go into the process with a better idea of which one might be best for your borrowing needs.