Loan Categories

Categories of loans are different from types of loans because each of the categories falls into secured or unsecured. Each category of loan could, in actuality, be subdivided even further depending on the specifications each one carries. It is not unusual to find multiple levels of loans being offered to consumers and the ones who do the most investigating into the loans available will probably be the ones who come out ahead with the best interest rates and repayment terms. Let’s take a look at some of the most common categories of loans.

Government Loans

Government loans are definitely one of the categories that can be subdivided multiple types. Borrowers can secure mortgage loans subsidized by the government, student loans for schooling, and small business loans. Each of the subdivisions helps a different sector of the population reach and fulfil their dreams.

Mortgage loans subsidized by the government include FHA, VA, and conventional home loans. FHA loans are designed for lower to middle income applicants who may not have the cash on hand to close a conventional loan, and desire to wrap the down payment into the loan itself. VA loans, which are guaranteed by the U.S. Dept. of Veterans Affairs, are designed to help veterans and active service personnel obtain a home loan of up to $203,000.00 without a down payment. Conventional loans are straightforward mortgage loans and can usually be acquired by anyone with perfect credit.

Most mortgage loans are covered by the government and they can a fixed or variable rate. A fixed rate loan is any type of loan listed above where the interest rate remains the same across the entire length of the loan. A variable rate loan is one where the interest rate fluctuates over the life of the loan based on the current interest rate trends. Balloon mortgages are short-term loans at a fixed rate, usually with terms of 3, 5, or 7 years. The payments are bases on a thirty year loan and at the end of the term, a lump sum payment for the rest of the loan is due.

Mortgages are not the only loans the government subsidizes. Many college students and their families find that they are need of extra money to cover the cost of education. Families can get a loan for the students, or for the parents, and there are a few government loans available to help. Repayments of these loans do not start until the student has graduated and secured gainful employment. If the student has difficulties securing a job, deferments are available to help them along.

The easiest student loan to obtain is a Federal Stafford Loan. These are available to all students, whether they are in an undergraduate or graduate program. They have fixed rates, no credit checks, and postponed repayments. Any full-time student can apply for one of these loans. If the parent wants to cover the cost of their child’s education, a Federal PLUS loan for Parents is the way to go. Parents can borrow the total cost of their child’s undergraduate program and they are not need-based so any parent with a steady income can qualify. Federal Grad PLUS Loans are designed for the student to borrow all of the cost of their higher-level degree and can used to pay not only for school-related expenses, but also living expenses. A Federal Consolidation Loan is a loan that combines all of the student’s education loans into one easy and affordable loan, sometimes with a better interest rate than before.

The government will also help qualifying borrowers get capitol to start their own small business. The Small Business Association (SBA) was designed to act as the government agent in providing start up capitol in the form of loans or grants, help businesses budget and use their money wisely, and give overall general support to anyone who is business minded. The SBA will also help businesses partner with organization such as NASA and MSHA to promote their services and products.

There are other government loans available and each country around the world may have their own versions of the ones listed above. Potential borrowers should research more information on what is available to them online, at their local library, or contact their local government representative.

Car Loans and Leasing

In the day of the two-working parents, the need for two cars is almost overwhelming, especially in rural areas where travel time to and from their place of employment can be as long as an hour. Plus, public transportation in some countries is not as prevalent as in others. In the United States, bus, railway, and subway service is not as common as it is in the United Kingdom.

Vehicle loans come in long term or short term. Long term loans, which can last up to sixty months (five years), are designed for the purchase of brand new cars. They usually provide a better interest rate and smaller monthly payments, but borrowers will pay more interest during the life of the loan than those with a short term loan. Borrowers must remember that the car they purchase will depreciate in value over the years and if it is destroyed before the loan is paid off, they may not receive enough from their insurance company to completely pay off the loan.

Short term vehicle loans are designed for people purchasing used vehicles. These loans are awarded for up to thirty-six months (three years) and have higher monthly payments. While this may seem a downfall to some consumers, they will actually pay less for the vehicle by the end of the loan agreement.

Vehicle leasing has become a very popular practice for people who do not wish to outright purchase a new vehicle. This works by the purchaser placing a down payment on the vehicle and then making monthly ‘lease’ payments on it for a set number of years, usually three to five years. At the end of the two years they have the option to buy the vehicle or turn it back over to the dealership they leased it from in exchange for another, newer vehicle if they so desire.

Many people do not have the disposal cash handy when the lease comes due and they want to keep the car that they have leased. After all, most people take the time to keep up the vehicle and feel that if they have spent money out of pocket to do this, they have the right to hold on to a vehicle they know. When this happens, they have the option to secure a lease buyout loan. Most conventional lenders, such as banks and credit unions, will award a secured loan to the borrower and pay off the leasing company on their behalf. The borrower now goes to making their monthly payment to the lender and the car is theirs. Many small businesses use the leasing option in order to get their cars at a lower cost.

Personal Loans

At some point in their life, everyone has some type of personal loan. Personal loans are unsecured and the lender bases their decision to give a borrower one of these loans on the borrower’s credit. Occasionally the lender will ask for some type of collateral. This would in instances where the borrower is using the cash from the loan to purchase a used vehicle or other big-ticket item, such as boat. Personal loans are commonly unsecured loans but sometime they can be secured loans depending on the borrower’s particular financial situation.

While most personal loans can be used for purchasing things, such as new furniture over a short period of time, the majority of personal loans are for debt consolidation. This type of loan allows the borrower to consolidate as many debts as possible into a single monthly payment and lower interest rate. Lower interest rates are extremely appealing since borrowers can pay off their high interest rated credit cards and no longer be financially strapped. Lenders will award these to people with good credit, the ability to make payments on a monthly basis due to a steady income, and, if necessary, can provide a co-signer or some for of collateral.

Not all personal loans are for extended lengths of time. And not all of them are issued by banks. A refund anticipation loan is a cash advance made against the borrowers anticipated income tax refund. If the borrower knows they will be getting money back, they can request one of these loans if they are in need of cash. The ‘lender’, usually a tax preparation company that is working in conjunction with a financial institution, will issue the borrower the refund, usually in the form of a prepaid credit card. They will charge a processing fee and it will vary from place to place.

Payday loans – also known as payday advances, cash advances or pay check advances – are short term loans to qualified borrowers that are to be paid back on the borrower’s next pay check. These loans can only be issued for a set amount based on the borrower’s pay scale and are for two weeks, give or take a few days depending on the exact day of your pay and the day you are borrowing the money. Interest rates on these short-term loans are steep, ranging anywhere from 390 to 900 percent, and there is also a set service fee.

These payday loans are handy for a quick fix only and consumers must be aware that if they borrow too much, they could have problem repaying the loan later. Sometimes this is the only option open to people who have bad credit or no credit and are ineligible to get any other form of monetary assistance. If they budget their future income properly and can safely take a payday loan without it strapping them, then they should be okay.