Many of us have experienced a time when we found we did not have the money we needed and needed to take out a loan. Sometimes we want to buy a house or a car, and other times we want to pay for an experience, such as a wedding or our dream remodel. There are so many different types of loans that we may not know where to start. Understanding what each type of loan is used for and the pros and cons of each loan type will help us all find the loans that will best meet our needs. Three common types of loans we might consider include installment loans, mortgages, and home loans.
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Installment Loans
Installment loans are financing options that allow us to borrow a set amount of money and repay it gradually over time. Personal loans, which are a type of installment loan, often have fixed interest rates and regular monthly payments, so we always know how much we owe each month and when our last payment will be due. These loans could be used for anything from buying a car, debt consolidation, funding a wedding, or a home remodeling project. This flexibility is great for anyone who needs extra money but wants to have the maximum flexibility in how they use that money.
When getting an installment loan, we should compare lenders to find one that offers the best rates, terms, and loan features. Every lender will have different rules that we need to be aware of in advance if we want to be successful. For example, we don’t want to face unforeseen charges because we paid back our loan too quickly. Banks, credit unions, and online lenders such as Western Shamrock all offer personal installment loans. If we want to consolidate debt, do some home repairs, deal with an emergency, or simply get the newest tech gadget, an installment loan is a great option for us.
Mortgages
When people say “mortgage,” they usually mean a traditional mortgage, in which a financial institution, such as a bank or credit union, loans money to a borrower to help them buy a home. This is arguably one of the most common types of loans. There are various types of mortgages, each with its own set of advantages and disadvantages. Mortgages are often the way that we find the money we need to buy a home, a business, or a piece of land.
The interest rate on a fixed-rate mortgage, for example, is fixed for the duration of the loan, resulting in fixed monthly payments. However, if we end up with a loan that has a high-interest rate, we are stuck with it. An adjustable-rate mortgage (ARM), on the other hand, fluctuates following a fixed-rate cycle, which can last for months to years. This means that the initial interest rate on an ARM is usually lower than the initial interest rate on a traditional fixed-rate loan. On the other hand, this means that future rate rises may be substantial, leaving many adjustable-rate mortgage borrowers with significantly larger monthly payments than if they had chosen a fixed-rate mortgage.
Home Loans
A home equity loan is frequently also referred to as a “mortgage”. The primary distinction between a home equity loan and a standard mortgage is that a home equity loan is obtained after purchasing and accumulating equity in the property. On the other hand, a mortgage is the lending option that normally permits us to purchase our property in the first place.
A home buckets equity loan is secured—that is, guaranteed—by a homeowner’s equity in the property, which is the difference between the property’s value and the existing mortgage balance. For example, if we borrow $250,000 on a $350,000 home, we have $100,000 in equity. Assuming our credit is good, and we otherwise qualify, we can take out another loan with $100,000 as collateral. This means we should make sure to take out a loan that we can pay back because we don’t want to lose our home because we were unable to pay back our loan. A home loan works well if we know we will have the money we need later and simply need more for the upfront costs of starting a project.
