An introduction to loans

What is a loan?

In some situations, getting a loan can be a real lifesaver. Whether you’re buying a home, a car, going to college or just need that extra bit of help, a loan can make our dreams come true.

There are multiple types of loans available, and they are not too hard to get, especially if you have a decent credit score.

A loan is a sum of money that any individual, business, or company can borrow from another to meet a financial requirement. The person who needs the money is known as the borrower, and the person who supplies it is known as the lender. By taking the loan, the borrower acquires a debt that they must pay back to the lender with interest. The interest rate is pre-decided and is often done so by considering your credit score. If you have a high credit score, your interest rate may be significantly lower than someone with a low credit score. However, this does depend on varying factors. Consider a mortgage, this is a form of loan, and this is always determined by accumulated debt and credit score.

What are the types of loans?

You can borrow money for many reasons, and the money that you borrow can have many uses. You could use it to fund a new business, buy an engagement ring, buy a house or a car. However, there are so many types of loan out there, and it can be hard to pinpoint which is best for which purpose.

There are a multitude of types of loans that you can get, let's have a look at the most common ones.

Firstly, though, note that personal loans and credit card loans both come with higher interest rates, but they do not require collateral. On the other hand home-equity loans have low-interest rates, yet the borrower's home will then serve as collateral.

Personal loans.

A majority of banks will offer personal loans, and the proceeds from these loans can be used for pretty much anything from paying bills to buying a new television set up. This is a pretty expensive way to get some money as the loan is unsecured, meaning there is no collateral.

A personal loan can usually be obtained for a few hundred dollars to a few thousand, and they will typically have repayment periods of two to five years on average.

To take out a personal loan, you will need some form of income verification and proof of assets worth at least as much as the amount that is being borrowed. The application is rather short, and you will typically get approved or denied for your loan in just a few days. For more information on personal loans, check out CreditNinja's personal loans.

Home-equity loans.

If you own your own home, you can borrow against the equity you have built up. Meaning, you could borrow up to the amount that you own. If half of your mortgage is paid off, then you can borrow half the value of the house. However, if the house has increased in value by 50%, then you could borrow that amount. Basically the difference between the home's current value and the amount still owed is the amount that can be borrowed, it just takes some basic math to figure it out.

Credit cards.

When you pay with a credit card, you are pretty much taking out a small personal loan. If your balance is paid in full immediately, then you will not be charged any interest. However, if some debt remains, then the interest is charged each month until it is paid off.

Small business loans.

Small business loans are available through a majority of banks and throughout the SBA. These are often caught out by people who are setting up new businesses or who are expanding already established businesses.

These loans are granted after the owner of the business has submitted a formal business plan for review. The loan terms will include a personal guarantee, meaning the owner's assets will serve as collateral.

How do you decide which loan to apply for?

The most simple type of loan to apply for is a personal loan. There are many steps to take, first of all though, you need to ensure that this is the correct type of loan for you. If you need to borrow to remodel your house or buy a car, a home equity or auto loan is better. Personal loans are based on your creditworthiness, whereas home equity or auto loans are secured by the home or the car. Auto loans are specific to vehicles, and are the perfect loan should you need to buy a new car, these will be secured by the vehicle purchased. It is never necessary to use a personal loan to buy a car, auto loans are made for this purpose, and are usually unaffected by creditworthiness.

Despite how buying a vacation or consolidating debt is valid for a personal loan, you might also want to check onto a 0% introductory APR card for this. If you do this, though, ensure that you can pay off the balance before the 0% rate expires!