What Types of Loans Are There?

What Types of Loans Are There?

If you find yourself in need of funds, you might be wondering what type of loans are out there. To help you sort through the options, we’ve collected several examples of loans, including auto loans, personal loans, student loans and mortgages.

Read on to learn about the different types of loans and which one would suit your financial needs:

Open-end vs. closed-end loans

Open-end loans, such as credit cards, offer revolving credit, meaning debt can be added to the loan as needed. By comparison, loans for a predetermined amount, such as auto loans, are considered to be closed-end loans.

Open-end loans

Examples: personal lines of credit and credit cards

Open-end loans offer you the chance to borrow as much or as little money as you want, up to a certain amount, and then pay back some or all of the funds monthly. There’s no end date for this type of loan; it’ll always be open for you.

The upside to an open-end loan is that you’ll be able to use exactly as much money as you need when you need it. This can come in handy if, say, you’re temporarily short on funds. The downside is that if you only make the minimum payments, the interest can add up.

Watch out for open-end loans with a variable interest rate, which fluctuates depending on the market. This can add a sizable chunk of money to your payments if interest rates rise over the life of the loan. You can find more information on variable rates below.

Closed-end loans

Examples: auto loans, student loans and mortgages

Closed-end loans are probably what you think of when you imagine a traditional loan. You borrow money for a specific purpose, such as paying for a car or house, and then you make monthly payments until it’s paid off.

Closed-end loans are installment loans. When you borrow money, you make payments in installments until the loan is paid in full. You might have a five-year car loan or a 30-year mortgage — both have endings.

Closed-end loans are clear-cut since you know exactly how much you’ll borrow and when you’ll have it paid off. Once the loan is paid off, you’ve held up your end of the bargain. And if you need to borrow money, you’ll have to get another loan, which can be costly with origination fees.

Fixed-rate vs. variable-rate loans

A variable rate is an interest rate that fluctuates over the life of a loan based on market conditions. A fixed rate means your interest rate never changes, regardless of how the market plays out.

You have the opportunity to choose a fixed or variable rate, depending on the lender and the type of loan.

Fixed-rate loans

Examples: federal student loans and some personal loans, auto loans and mortgages

If you have a federal student loan, it’ll come with a fixed interest rate. Congress determines these rates annually.

You can also get a fixed-rate mortgage, which means the interest rate won’t change for the duration of your home loan. This can be valuable if interest rates are low but you expect them to increase in the future.

Variable-rate loans

Examples: some private student loans, personal loans, auto loans and mortgages

If you get a loan with variable interest, it means your payments fluctuate depending on an underlying index rate that tracks the market.

Secured vs. unsecured loans

When you apply for a secured loan, you offer up something as collateral if you can’t pay off your loan. If you default on the loan, a creditor could seize your asset.

For an unsecured loan, you don’t have to provide any security for the debt, which means that if you can’t pay it back, it will go into collections and will tank your credit score.

Secured loans

Examples: mortgages and car loans

When you take out a car loan or get a mortgage, you’re receiving a secured loan. It’s easier to get because the collateral you put up secures your loan.

If you fall behind on your payments, your car could get repossessed or your house could be foreclosed on. Secured loans sometimes have lower interest rates because if you can’t pay back your loan, lenders have a way of recovering at least some of the cost.

Unsecured loans

Example: student loans and most personal loans

Student loans are unsecured loans, since you don’t have to put up collateral to borrow them. Personal loans that you use for anything you’d like are usually unsecured loans, as well.

These don’t require any collateral and are based on your credit score and income. You can use the loan however you wish, but you might have a harder time getting one if your credit history isn’t great.

Because there isn’t any collateral, unsecured loans tend to have higher APRs.

6 common types of loans

There are many types of loans that fall into the categories described above. Here are a few examples of loans that you might use at one time or another.

1. Student loans
2. Auto loans
3. Mortgages
4. Home equity loans
5. Personal loans
6. Refinance and consolidation loans

1. Student loans

These unsecured loans are meant for educational expenses, though the borrower can choose how exactly to spend the funds. Federal student loans are awarded to you based on your financial need.

If you don’t have enough money to pay for college even after federal student loans, you can take out private student loans, but make sure to compare lenders to see which offers the lowest interest rates and best repayment terms.

2. Auto loans

Whether you’re buying or leasing a car, an auto loan helps you pay for it if you can’t afford a full cash payment. They’re secured loans, which means if you don’t pay back your loan with minimum payments each month, your car could be repossessed.

Your interest rate depends on your credit score. If you don’t have great credit, you might need a cosigner for your auto loan.

3. Mortgages

Unless you can afford the entire cost of a home upfront, you’ll need a mortgage. It’s a type of secured loan that banks offer, usually with a low interest rate. If you can’t afford your mortgage payments and fall behind, you could lose your property.

4. Home equity loans

Home equity is the amount of your home’s value that belongs to you. In other words, it’s the total value minus anything you owe on it to a bank or other creditor.

You can typically borrow up to 85% of the equity you have in your home. People can use home equity loans for almost anything, but your home is used as security if you can’t pay back your loan. This means it could go into foreclosure if you fall behind on payments.

5. Personal loans

Personal loans can be a good option if you need cash. Whether you’re trying to pay off high-interest credit card debt or stay up to date on bills, you can use personal loans for many things. As with any financial decision, though, you’ll want to shop around and consider your decision carefully.

Unsecured personal loans are harder to get because they require a strong credit score. Payday loans are considered personal loans, but they should be avoided since they are short-term, high-interest loans. If you can’t pay it back by your next payday, don’t get a payday loan.

6. Refinance and consolidation loans

If you have a lot of different student loans, you might look into refinancing or consolidating them. This allows you to streamline your debt into one easily managed monthly payment.

Consolidation takes all your applicable debt and makes it into one loan, generally at a weighted average interest rate. You can consolidate your federal student loans, for example.

Refinancing loans replaces one or more loans with a new one, often with a lower interest rate, a longer repayment term, or both. If you’re struggling to pay high-interest student loans, credit card debt or your mortgage, you might consider refinancing those loans.

How to find a loan that’s the right fit for you

Now that you’re familiar with the different types of loans, you can go through all your options to find the one that fits your situation best.

From secured or unsecured to variable or fixed, there are plenty of choices. The next step is to compare lenders and other options to get good repayment terms for your budget and low interest rates.

Rebecca Safier contributed to this report.