5 Types of Loans to Consider When Faced with Large Expenses

Seeking out financing options is the only natural course of action when faced with an expense that exceeds the amount a person has saved up in their accounts.

After all, less than half of all Americans state that they can afford an emergency expense if it came up. Given this statistic, the most common financing choice considered tends to be taking out a loan. 

Unfortunately for potential borrowers, there are a variety of loan types to consider which tend to be better suited for certain types of people. Learn everything there is to know about the different types of loans to determine which is best for you. 

What is a Loan?

The first step to determining which type of loan is the right choice for your financing needs starts with identifying what exactly a loan is. For those who may have never borrowed one before, a loan is a form of credit in which one person borrows funds from another person or group in order to meet some type of financial need to be paid back at a later date with interest. 

A person needs to apply for a loan in order to be eligible, and factors such as credit score, credit history, income level, and more will be taken into account during the application process. 

Secured vs. Unsecured Loan

Broadly speaking, there are two types of loans a person can consider taking out: secured and unsecured loans. An unsecured loan is a loan in which a lender (the party loaning the funds) gives the borrower (the party requesting the funds) the lump sum of cash on nothing more than trust that it will be paid back by in full by the promised date.

On the other hand, a secured loan utilizes something known as collateral and is typically used when lenders are giving money to riskier borrowers. This collateral can be anything from a vehicle the borrower owns, the equity they have in their home, or even simply a cash advance that is equal to the value of a portion of the loan. 

How Does a Loan Work? 

When taking out a loan, it can be confusing to understand how the loan borrowing process works in regard to paying back the money. First and foremost, it’s crucial to look at the terminology involved with taking out a loan:

• Principle: The principle of a loan is the lump sum amount that a person is borrowing from the lender. 

• Tenor: The tenor of a loan is the amount of time the borrower has to repay the loan in accordance with the outlined contract. 

• APR: The APR of a loan is the percentage of additional funds that a borrower will be required to pay to a lender and includes the interest rate and any other fees. 

• Monthly Payment: The monthly loan payment is the amount of money a person is required to pay toward their total loan repayment on a monthly basis. 

A person who takes out a loan will be told exactly what their monthly payment is, which will include the APR and any additional costs. They will then be responsible for making this payment on a monthly basis to ensure they stay in good standing with their debt. Once the total amount has been paid off, their financial obligation is complete.

Pros to Borrowing with a Loan

• Quick access to much-needed cash for a variety of reasons

• Oftentimes a loan is unsecured which means it requires no collateral

• Interest rates can be low on loans depending on credit score

• Loans can increase a person’s credit score when handled responsibly 

Cons to Borrowing with a Loan

• A person’s credit score can quickly be ruined if they do not practice good borrowing habits

• Meeting a financial obligation by taking on debt is not always a great strategy

• Some loans require collateral which is a great risk

• Certain loans may have hidden fees or penalties 

3 Loans to Consider for Expenses

As mentioned, there are a variety of different loan options to consider based on a person’s needs. The following loan types are among the most commonly used by people around the world: 

1. Personal Loan

First and foremost, a personal loan is a short-to-long term loan, with a tenor or two to seven years, that offers interest rates ranging from 6%-36% depending on a person’s credit. Generally, a personal loan allows a person to take out anywhere between $10,000-$100,000 and offers same-day funding on the loan. 

2. Title Loan

Another common type of loan for a person to consider is a title loan. When thinking about whether or not to apply for a title loan in Florida, consider what exactly this loan type is. This is a short-term, high-interest loan with a tenor of around thirty days that offers a person a portion of the value of their car title as a loan amount. This is a secured loan, meaning your car’s title is at risk if you fail to repay the loan. 

3. Home Equity Loan

A home equity loan is another option to consider and allows a potential borrower to take out funds matched against the equity they have in their home. This amount is typically 50-75% of that equity, and the tenor to repay the loan is similar to personal loans but can be slightly longer in some situations. Interest rates are also similar to that of personal loans. 

Meet your financial obligations today

When it comes to meeting your financial obligations, there is no single right or wrong answer when taking out a loan. However, certain types of loans will be far better suited for certain people. Consider your current income level, along with any existing debt, in order to gain a full picture of your current financial standpoint. After this, consider the different interest rates you may have been offered in order to determine which types of loans are most affordable given your specific financial situation.