Whether you need a loan to buy a home, go back to college, or cover an unexpected expense, it can be difficult to know where to start.
At Upstart, we know choosing between different types of loans can feel overwhelming. With that in mind, we created this beginner’s guide to borrowing. Here, we’ll break down the different loan types available to consumers. We’ll also discuss the 5 factors to consider when shopping for a loan. Read on for everything you need to know about some of the most common types of loans.
The 7 most common loan types
1. Personal loans
When you get approved for a personal loan, you usually receive your money upfront in a single lump sum. Then, you make fixed monthly payments over a set term to repay the loan principal, plus interest.
Your loan term may range from as little as 6 months to as long as 10 years. The length of your loan depends on several factors, including the loan amount, your lending company, and your credit history.
Most personal loans are unsecured, which means they aren’t backed by any collateral like your home or car. If you can’t repay the loan, your lender won’t repossess your personal property to cover its loss. Other types of personal loans work similarly.
Some lending companies give their loans specific names based on their purpose, such as a wedding loan. You may find that loans designed for certain expenses have different interest rates, funding timelines, or minimum and maximum loan amounts.
Let’s take a look at some of the most common types of personal loans and their purposes.
|Type of Personal Loan||Purpose|
|Debt consolidation loans||
|Credit card refinancing loans||
|RV or boat loans||
|Home improvement loans||
2. Student loans
Borrowers use student loans to pay for college tuition and other related expenses. In many cases, students take out federal loans held and managed by the Department of Education. However, some students also borrow from private lenders to bridge the gap between their federal loans and actual expenses.
Choosing to take out a federal or private student loan is a personal decision. It’s important to understand potential interest rates and repayment periods before signing onto a loan.
Let’s take a closer look at average interest rates and term lengths for federal and private student loans.
|Type of student loan||Federal (Subsidized and Unsubsidized)||Private|
|Potential interest rates|
|Credit score requirements||
Student loans have helped countless students further their education. Even so, the student loan repayment process can be difficult to navigate. Make sure you do your research and consider alternative funding options before signing onto a student loan.
3. Mortgage loans
Mortgage loans provide financing when buying a home. Also known as a home loan, mortgages often come with terms ranging from 10 to 30 years.
Mortgage loans vary based on several factors, which we’ll go over below. However, virtually every mortgage loan shares one similarity: they’re backed—or secured—by your home.
Secured loans tend to come with lower interest rates and longer repayment periods since they’re less risky than an unsecured loan. It’s important to make sure you can cover your monthly payments. Otherwise, your mortgage provider could repossess your home.
Depending on your lending company, loan amount, and other details, your mortgage loan may come with fixed or variable interest rates. Fixed rates are set at the start of your mortgage and won’t change throughout the life of your loan.
On the other hand, variable rate loans may change on a monthly, quarterly, or yearly basis. Also known as adjustable-rate mortgages, these loans are associated with an internal or external financial index. If the index rises, your interest rate will typically increase. If the index falls, your rate will usually decrease along with it.
Some mortgages are backed by government bodies, like the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA), or the Department of Veterans Affairs (VA). Those held by private lending companies are known as conventional loans.
Generally, government-backed USDA, VA, and FHA loans come with lower down payments and fewer qualification requirements. However, the interest rates may be slightly higher than a conventional loan.
On the other hand, conventional mortgages may have stricter qualification guidelines. But you may be able to get a more affordable interest rate if you’ve got a solid credit score.
Finally, some mortgages come with optional additions that increase the functionality of the loan. For instance, some lenders allow you to build down payment assistance into your mortgage. Alternatively, you may be able to add renovation costs to your home loan.
4. Auto loans
An auto loan finances a new or used vehicle. Like mortgages, auto loans are usually secured loans guaranteed by your vehicle. While that can help you get a lower interest rate, it also means your lender could seize your car if you default on the loan.
You can apply for a car loan through a variety of lenders, including your auto retailer, online lending platforms, credit unions, and banks. Terms can range from 3 to 7 years. Shorter loan terms may come with lower interest rates, while longer terms typically feature lower monthly payments. However, you’ll likely spend more on interest over the life of the loan.
There’s no set minimum credit score needed to qualify for an auto loan. Still, a good-to-excellent score will help you secure a loan with a lower annual percentage rate (APR). That means you’ll pay less in interest and fees and more toward your loan principal.
No matter where your credit score falls, it’s a good idea to shop around and compare offers from different lenders. If you realize you got stuck with an unaffordable auto loan, you’re not out of luck. You may be able to get a better interest rate or lower monthly payments by refinancing your auto loan.
5. Payday loans
Payday loans are short-term loans that borrow money against your paycheck. These loans usually come with short repayment periods—think, 2 to 4 weeks. Many payday loans have interest rates ranging from 391% to 600% or higher, making them extremely difficult to repay on time.
Payday loan providers often set few qualification guidelines. As long as you can prove you’re older than 18, have a source of income, and an active checking account, you’ll likely qualify. That doesn’t mean a payday loan is a good idea, though.
These predatory loans carry steep interest rates, short repayment periods, and hefty rollover fees which leave borrowers in a cycle of expensive debt. As such, it’s best to avoid payday loans at all costs
6. Small business loans
Small business loans help business owners and entrepreneurs fund daily operations or bring a new idea to life. You can secure a small business loan from banks, online lending platforms, credit unions, or the Small Business Association (SBA).
Depending on your loan amount and lender, you may be able to choose terms ranging from 3 months to 25 years. Qualification guidelines are flexible too. In most cases, you can qualify for a small business loan no matter if you’re a sole proprietorship, a limited liability company (LLC), or a small corporation.
Like most loans, your rates will vary based on the lender, your creditworthiness, and other factors. With that said, it’s a good idea to shop around and compare offers. Doing so will allow you to secure the best rate and a monthly loan payment that works for your business.
7. Home equity loans
A home equity loan allows you to borrow against the equity you have in your home. Also known as a second mortgage, you can usually borrow up to 85% of your equity. You can calculate your equity by subtracting what you owe on your mortgage from your home’s market value.
Generally speaking, home equity loans are secured, which means they’re backed by personal property. In this case, your lender uses your home to guarantee the loan. As a result, you may be able to qualify for a lower interest rate.
Home equity loans are generally more flexible than a standard mortgage. You can use a home equity loan for almost any expense, ranging from home renovations to college tuition, trips, or funeral costs.
Like a personal loan, a home equity loan is a type of installment loan. You’ll receive the funds from your home equity loan in a single lump sum. Then, you’ll make monthly payments on your loan until it’s paid off.
What to consider before applying for a loan
Ready to start your borrower’s journey? Once you determine which type of loan account you need, it’s time to find the best loan—and loan provider—for you.
If you feel overwhelmed by your options, use this quick checklist to help narrow your search:
- Check your credit score.
- Review your credit history.
- Determine how much you need to borrow.
- Consider the loan terms carefully.
- Clarify the available rates.
- Calculate your monthly payment using a personal loan calculator to ensure you can cover the costs of your loan.
Choose the best type of loan for your needs
After reading this guide, you’re likely more familiar with the different loan opportunities available based on your needs and financial circumstances. As a result, you can feel empowered to pick the best loan for your needs.
That may mean that it’s time to look into an auto refinancing loan to help you save more each month. Or you may decide to take out a fixed-rate wedding loan to cover the costs for your big day. No matter what you choose, take the time to research your options, check your rates, and find a safe, legitimate lender to help you build a better financial future.
Car refinance loans not available in IA, MD, NV, or WV.