Saving to purchase or pay for something instead of taking out a loan is usually ideal. However, that is not always the case. For example, paying off big-ticket items such as a house or a car in one go can strain your finances, particularly for younger people who are just starting. 

Some people have business ideas but lack the funding to execute them. Loans are effective tools that the wealthy have used for a long time. Instead of putting up their own money for a business venture, they take on loans to finance these endeavors. Still, others take on loans for emergency purposes. 

For whatever reason you decide to take out a loan, you should know the types of loans and their purpose. That can help you decide the best one for your needs before you sign any documents.  

Here are common types of loans you can take on in the US:

Student Loans

Student loans cover tuition fees, daily living expenses, books, and supplies needed by a college student. In the US, these expenses can go up to an average of $35,331 per year.    

There are four types of student loans:

• Need-based loans 

• Non-need-based loans

• State loans

• Private loans

Mortgage Loans 

Mortgage loans help in financing the purchase of a house. In some cases, you can borrow money against the value of a home for other purposes. The typical mortgage lenders are banks, credit unions, and government-backed mortgage loan programs. 

Personal Loans 

Personal loans can be broken down into two categories: secured and unsecured. Secured loans are backed by collateral, something of value that you forfeit to the lender if you default. 

Unsecured loans do not involve collateral. However, the interest rate is much higher than secure loans because the lender takes on more risk. 

People typically spend on the following when they get personal loans: 

• Weddings

• Emergency expenses, i.e., hospital bills 

• Electronic gadgets  

• Side-hustles  

• Vacations   

Credit-Builder Loans 

Credit-builder loans help people with poor or no credit scores on file. These are short-term loans that typically last around 6 to 24 months. You can apply for a credit-builder loan with credit unions, community banks, online lenders, and Community Development Financial Institutions (CDFIs). 

Car Loans

Car loans are intended to help people buy a car in installments. Car loans are examples of secured loans where the car is the collateral. The lender may repossess or take it away if you default. 

Banks, credit unions, and online lending companies typically offer these auto financing services. Some car dealerships offer in-house car loans, but these tend to be more pricey than loans from third-party lenders. 

Payday Loans 

Payday loans are handy if you need cash fast. They are short-term loans for small amounts, usually until your next paycheck. However, the interest rates are very high. If you miss paying on time, the lender can charge more than the amount you initially borrowed; it is best to steer clear of this type of loan as it is not very sustainable. 

Small Business Loans 

Small business loans, also called Small Business Administration (SBA) loans, are vital tools for a business to grow exponentially. It has low-interest rates and payment terms of up to 25 years. These loan amounts are typically around $30,000 to $5 million. 

However, there are different types of small business loans. You can pick one that will best suit your needs.  

• SBA micro-loans – With loan amounts up to $50,000, this type of loan is excellent for small businesses and startups. The funds may be used as working capital and replenishment of inventory and supplies. They may also be used to purchase or maintain equipment to run the business. Interest rates for this type of loan are around 8% to 13%.   

• SBA 7(a) loans – You can borrow up to $5 million. The funds may be used as working capital, purchasing of business supplies, and debt refinancing. You may also use the funds to purchase real estate. Interest rates for this type of loan are around 5.5% to 11.25%. 
   

• SBA 504 loans – Like SBA 7(a) loans, you can borrow up to $5 million. You can use the funds to fix and purchase assets such as buildings, real estate, and heavy equipment. However, you cannot use it as working capital or to purchase inventory. Interest rates with this type of loan are lower due to its limitations, typically around 2.81% to 4%.

Conclusion 

Banks and loans are ancient concepts deeply rooted in humans. They can be dated as far back as 1,800 BC in Babylon. These old financial concepts play a significant role even in these modern times. Knowing the key differences between each type of loan, the limitations, and different interest rates and learning how to leverage this tool will increase your odds of financial success.