Types of Loans

Finding the right loan to meet your financial needs and budget can help you cover all sorts of expenses, from small emergencies to major purchases. Loan rates and terms vary, but when you take out any type of loan, you agree to repay the lender the money you borrowed plus any interest and fees. How long you have to repay depends on the loan terms.

Let’s dive deeper into the different types of loans available so you can choose the right option for your situation.

How do loans work?

Loans allow you to borrow money from a bank, credit union, or online lender. Once you take out a loan, you’ll gradually repay the full amount plus interest, often via monthly payments. If you don’t have the money saved up to pay for a certain expense or you’re facing a financial emergency, a loan may be a great option.

Different types of loans

The various types of loans offered by lenders include:

Payday Loans

Payday Loans are short-term, small-dollar loans. You’ll have to pay them back in full the next time you get paid, likely within two to four weeks. These types of loans provide money for expenses or emergencies until you get your next paycheck.

Pros:

• Easy application.
• Good option for borrowers with bad credit.
• Quick funding upon approval.

Cons:

• Must be repaid in full on your next payday.
• Can only borrow small amounts based on your income.

Installment Loans

Installment Loans allow you to borrow a lump sum of money upfront. You’ll repay this type of loan through monthly payments, called installments, over an agreed-upon term. Loan repayment terms for installment loans can range from a few months to several years.

Pros:

• Larger loan amounts available.
• Longer repayment terms allow you to make payments over time.
• You can use the funds to pay for large purchases or projects like home improvements.

Cons:

• Borrowers with bad credit may have difficulty being approved.
• Some lenders have shorter repayment terms, which means higher payments.

Title loans

Title loans are small-dollar secured loans that require you to use your car title as collateral. The value of your car will determine how much money you can borrow. The benefit of a title loan is you can continue to drive your vehicle while you repay the loan.

Pros:

• Easy application and appraisal process.
• You don’t need good credit.
• You can drive your car while making payments.

Cons:

• You risk losing your car if you can’t make payments.
• You must have a free and clear title to get approved.

Lines of Credit

A personal Line of Credit is a kind of like a credit card in that you’re approved for a set credit limit – but that’s where the similarities end. With a Line of Credit, you tap into your available funds by withdrawing money as needed up to your borrow amount, which lenders will determine based on factors such as your credit history and income. You’ll only pay interest on the amount you borrow.

Pros:

• You’re only charged interest on the amount you borrow.
• Once you repay what you borrow, you have access to the full amount again.
• There’s a source of money available for when emergencies arise.

Cons:

• Carrying a high balance can lower your credit score.
• Borrowers with bad credit may have a hard time getting approved.

Mortgages

Mortgages are home loans. With a mortgage, you borrow the money you need to purchase a home. Most borrowers repay a mortgage over a 30-year period via fixed monthly payments, but 15-year and variable-rate mortgages are also available.

Pros:

• Allows you to buy a home and start building equity rather than rent.
• Making payments can build an asset for your future.

Cons:

• Can be a complicated and lengthy process.
• Requires excellent credit and money for paying closing costs and fees.
• May require a hefty down payment.

Home equity loans and HELOCs

Homeowners can take out loans or lines of credit that borrow against the equity they’ve built up in their property. Equity is the difference between your mortgage balance and how much your home is worth.

Pros:

• Getting approved can be easy if you meet the basic lending requirements.
• Making payments puts equity back into your home.

Cons:

• You must be a homeowner.
• You typically need 20% equity in your home to borrow against it.

Pawn shop loans

Pawn shop loans are small loans you can take out if you have valuable items like jewelry or appliances. In most cases, the amount you receive will be a percentage of your item’s value. The pawn shop will then keep your item until you pay back the loan. If you don’t repay the loan, the pawn shop keeps your item and sells it to recover the loan amount.

Pros:

• Quick way to get a small loan.
• Good option if you have bad credit.

Cons:

• The loan amount is only a small percentage of the item’s value.
• You risk losing your item if you fail to repay.

Auto loans

An auto loan is money you borrow to buy a car, truck, or SUV. You can finance the full purchase price or make a down payment and get a loan for the remainder of the purchase price. Auto loans can either be financed through the dealership, a bank, or a specialty lender.

Pros:

• Allows you to buy and drive a car without saving up enough cash to purchase one.
• Helps you buy a better-quality car than you might be able to afford with cash.

Cons:

• Interest on the loan means you end up paying more than the car originally cost.
• Depreciation means you could owe more on the loan than your car is worth.

Student loans

A student loan is money you borrow to pay for higher education expenses at a college or university. They’re typically offered through federal programs or private lenders.

Pros:

• Makes higher education accessible.
• Offers low interest rates compared to other kinds of loans.

Cons:

• Students start post-college life with debt.
• If you default on student loan, you may face severe penalties and can’t discharge the debt in bankruptcy.

What type of loan is right for me?

Before you begin the application process, consider your financial situation. Ask yourself how much money you need to borrow, what payments you can afford, and whether you’d like a one-time lump sum of money or a revolving credit line to borrow against as needed.

If you only need a small amount of money, for instance, a Payday Loan could be a good option. For borrowing a larger amount, you may want to consider an Installment Loan. And if you want a flexible option that lets you tap into money as needed, a Line of Credit might be the best option. Regardless, you should compare lenders and loan options to find the right loan for your needs.

Compare the types of loans available at Advance America

Whether it’s handling unexpected emergencies, earning an education, or becoming a homeowner, loans can make it possible to make ends meet, make major purchases, or invest in the future. Each type of loan has benefits and drawbacks for the borrower, but the right one can be a helpful financial tool when used wisely.

At Advance America, we offer a variety of personal loans suited to different needs. Compare our loan options on our website, visit us in-store, or apply online now to get an instant approval decision.