Types of CreditThe two basic categories of consumer credit are open-end credit and closed-end credit. Open-end credit, also called revolving credit, requires monthly payments that are less than the total amount due.
Examples of revolving credit are credit card accounts and home equity lines of credit. In each case, consumers can use their credit while paying on their account balance.
Closed-end credit provides a fixed amount of money to finance a specific purpose for a specific period of time.
Types of Loans
Loan types vary because each loan has a specific intended use. They can vary by length of time, by how interest rates are calculated, by when payments are due and by a number of other variables.
Student Loans
Student loans are offered to college students and their families to help cover the cost of higher education. There are two main types of student loans: those offered by the federal government, and those offered by private lenders. Federally funded loans are better, as they typically come with lower interest rates and more borrower-friendly repayment terms.
Mortgages
Mortgages are loans distributed by banks to allow consumers to buy homes they can’t pay for upfront. A mortgage is tied to your home, meaning you risk foreclosure if you fall behind on loan payments. Mortgages have among the lowest interest rates of any loans.
Auto Loans
Like mortgages, auto loans are tied to your property. They can help you afford a vehicle, but you risk losing the car if you miss payments. This type of loan may be distributed by a bank or by the car dealership directly. While loans from the dealership may be more convenient, they often cost more overall.
Personal Loans
Personal loans can be used for any personal expenses and don’t have a designated purpose. This makes them an attractive option for people with outstanding debts, such as credit card debt, who want to reduce their interest rates by transferring balances. Like other loans, personal loan terms depend on your credit history.
Loans for Veterans
The Department of Veterans Affairs (VA) has lending programs available to veterans and their families. With a VA-backed home loan, money does not come directly from the administration. Instead, the VA acts as a co-signer and effectively vouches for you, helping you earn higher loan amounts with lower interest rates.
Small Business Loans
Small business loans are granted to entrepreneurs and aspiring entrepreneurs to help them start or expand a business. The best source of small business loans is the U.S. Small Business Administration (SBA), which offers a variety of loan types depending on each business’s needs.
Payday Loans
Payday loans are short-term, high-interest loans designed to bridge the gap from one paycheck to the next. They are predominantly used by repeat borrowers living paycheck to paycheck. Because of the loans’ high costs, the government strongly discourages their use.
Borrowing from Retirement and Life Insurance
Those with retirement funds or life insurance plans may be eligible to borrow from their accounts. This option has the benefit that you are borrowing from yourself, making repayment much easier and less stressful. However, in some cases, failing to repay such a loan can result in tax consequences.
Consolidated Loans
A consolidated loan is a loan meant to simplify your finances. It is a loan that pays off all or several of your other loans and debts, particularly credit card debt. It means fewer monthly payments and lower interest rates. Consolidated loans are typically in the form of second mortgages or personal loans.
Borrowing from Friends and Family
Borrowing money from friends and relatives is an informal type of loan. This isn’t always a good option, as it may strain a relationship. To protect both parties, it’s a good idea to sign a basic promissory note.