Loans
There are different types of loans. Some are secured loans, where you pledge collateral. Collateral is an item you already own, such as a house or car, that you promise to forfeit to the lender if you are unable to repay the loan. If you cannot pay back the loan, the lender will take your collateral to get the money back. Unsecured loans, such as credit cards and student loans, do not use property as collateral. Lenders consider these as more risky than secured loans, so they charge a higher interest rate for them. Two very common types of secured loans are home equity and installment loans.
Home Equity Loans
A home equity loan is a form of credit where your home is used as collateral for the loan. This type of loan is often used to pay for major expenses, such as education, medical bills and home repairs. Consider carefully before taking out a home equity loan. If you are unable to make payments on time, you could lose your home.
Home equity loans can be either a revolving line of credit or a lump sum. Revolving credit lets you withdraw funds when you need them. A lump sum is a one-time, closed-end loan for a particular purpose, such as remodeling or tuition. Apply for a home equity loan through a bank or credit union first. These loans are likely to cost less than those offered by finance companies.
Installment Loans
Installment loans are loans that are repaid over time with a set number of scheduled payments. The most common installment loans are home or car loans. Before you sign an agreement for a loan to buy a house, a car or other large purchase, make sure you fully understand all of the lender's terms and conditions. The Truth in Lending Act requires lenders to give you this information so you can compare different offers:
- The dollar amount you are borrowing.
- The payment amounts and when they are due.
- The total finance charge, including all interest and fees you must pay to get the loan.
- The APR, the rate of interest you will pay over the full term of the loan.
- Penalties for late payments.
- What the lender will do if you cannot pay back the loan.
- Penalties if you pay the loan back early.
U.S. General Services Administration (GSA). (2016, January). Credit: Loans. In Consumer action handbook (pp. 13–14). Retrieved December 5, 2016, from https://www.usa.gov/