Consumer loans are sometimes necessary in order to make larger purchases, such as a house or car. Consumers can also use loans to pay for slightly smaller purchases, such as home improvements, or they may want to take out a debt consolidation loan. When taking out a loan, you should be sure to understand the terms that lenders use when talking about a loan. For example, there is a big difference in secured and unsecured loans, and the APR that you get on your loan will affect the total payment.
Unsecured and secured loans
Secured loans require some type of collateral to back the loan, such as a house or a car. If you default on the loan, the bank can repossess this collateral in order to recoup their costs. An unsecured loan does not have anything that's backing it, so it usually comes with a higher interest rate.
Annual percentage rate (APR)
The annual percentage rate, or APR, is the rate of interest you pay on a loan over the course of a year. A higher interest rate means that you will pay more on the loan overall.
In peer-to-peer lending, you receive funds from individual investors rather than a bank or lending institution. Interest rates are often lower, but you sometimes need to have a good credit rating and a good story for why you want the money in order to find lenders that are interested in you.
Payday and personal loans
Payday loans are very short-term loans that come with high fees. A payday loan typically must be repaid by the next payday and are for a small amount of money, around $200. You can get a personal loan through the bank. It can have a repayment term from around three to five years.
Home equity loan and home equity line of credit
In both a home equity loan (HEL) and a home equity line of credit (HELOC), you are borrowing money against the equity in your home, usually up to 75 percent of the equity. If you get a home equity loan, you will receive the full amount up front and will pay back interest on the full amount. If you get a HELOC, you only have to borrow money when you need it, up to the predetermined amount. Interest paid is only on the borrowed amount.
Debt consolidation is taking out one large loan in order to pay off all of your smaller debts. This is often convenient because it creates one monthly payment and you are often able to reduce the interest rate, spending less overall.