Types of Loans 101
There are many types of loans out there and figuring out which one fits your needs can be time-consuming and challenging. Mortgage loans, auto loans, student loans, secured loans, unsecured loans, open-ended versus closed-ended loans – the list can be pretty extensive.
Don’t worry, we’re here to help you navigate the complicated world of loan-speak. We’ve broken down the types of loans for you below so that you can quickly see your options. Here are the different types of loans:
Open-ended loans vs. Closed-ended loans
These loans offer you revolving credit. You’re approved for a specific amount known as your credit limit, so you use the credit as needed. The more you spend, the more the overall amount available to you goes down. Once you pay off that amount, you can reuse the line of credit again. One example is a credit card. Credit cards let you borrow as you need up to your credit limit. You continue paying the balance down until the debt is paid off, without a structured payoff.
Pros: You have the flexibility to access the credit when you need it.
Cons: There is no payoff date in sight. If your card has a variable interest rate, your interest can rise at any time. There can be a high monthly interest rate you pay if you don’t pay off the balance each month. If you just pay the minimum payment you can be paying a lot of interest and be trapped in a cycle of debt.
These loans are a category of installment loans, such as auto loans, mortgage loans, and student loans. You have a set amount and a structured payoff schedule. Once the debt is paid off, that’s the end. If you want to borrow money again, you’ll have to go through the application process again. One example would be a personal loan. There is a set term and amount. Sometimes the rate isn’t set for the duration of the loan since these loans can be both fixed rate and variable rate.
Pros: If you know exactly the amount you need to borrow and want to be able to circle the date your debt will be completely paid off, a closed-ended loan can be a smart option.
Cons: Often there is an origination fee to access the credit.
Fixed rate loans vs. Variable rate loans
These loans have a defined rate for the duration of the loan. For example, if you agree to a 5% rate for a 60-month term, the rate will stay the same for all 5 years of that loan.
Pros: Your rate is predictable and fixed for the duration of your loan. You can budget around your fixed monthly payments.
Cons: You can’t take advantage of the lowest introductory variable rates.
These loans have interest rates that can be changed as market interest rates change. For example, you can agree to a 60-month loan that is set at 5% for the first 24-months, but then the rate can vary from 3% to 12% for the remainder of the loan term.
Pros: You can benefit from a low interest rate if the market rate is low.
Cons: Your rate can go up if the market rate changes, making your payments higher and possibly unmanageable.
Secured vs. Unsecured loans
You can access these loans by guaranteeing your loan through collateral, such as a car or home. In case you fail to pay, the creditor can take your property and use the collateral to recuperate the money they loaned. For example, a car or home loan.
Pros: Often borrowers can get a lower interest rate because there is some guarantee that a lender can get their money back if you don’t pay.
Cons: Longer application process that usually requires appraisal. You don’t have flexibility to spend the money how you want. If you aren’t able to pay back the loan, your collateral can be taken away from you.
These are loans that don’t require any collateral. The Annual Percentage Rate (APR) depends on your credit history and income. An example would be an unsecured personal loan through Lending Club.
Pros: Flexibility to spend the money how you want. Often a faster application process because a lender is just looking at your credit profile and other personal information and isn’t appraising property. If you are looking for a lower loan amount and/or don’t have or want to put valuable assets on the line, an unsecured personal loan can be a great option to get the funds you need.
Cons: These loans can feature higher interest rates due to the lender’s exposure to more risk by not having any collateral associated with the loan.
In conclusion, the “right” loan for you depends on what you’re looking to use the money for and your personal financial situation. Personal loans through Lending Club are closed-ended, so you can circle the date you’ll be debt free – your monthly payment and loan term will never change over the life of your loan. They are also unsecured, which means we look at your personal credit history and financial situation to determine whether you qualify for a loan or not – no need to put your house or car on the line. If this sounds like a loan that fits your needs, you can check your rate in minutes online today!