Beginners’ guide to loans

In today’s society, cash flow and various forms of lending are essential to our personal and professional success. The average person will need to obtain at least one type of loan throughout their lifetime, whether it be a student loan, home equity loan, small business loan, payday loan, or even a bad credit loan. Smart, successful borrowing depends on knowing the basics of each type of loan as well which loan best suits your financial needs and personal goals.

There are two types of student loans: Federal and private. Both are characterized by loan interest rates; a federal loan has fixed rates, while a private loan is usually variable. Examples of Federal loans include the Federal Perkins loan, Stafford loan, Federal Family Education Loans, Ford Direct Student Loans, and Federal Student Loan Consolidation. Federal loans are e dispersed directly to the school, and are available based on financial need and at least half-time enrollment status. Private loans are more flexible in regards to financial need but may have a higher interest rate
A home equity loan (HEL) draws against the value of a person’s ownership of their home. Because the home is used as collateral, it is often called a second mortgage. It is generally only available to homeowners with a strong credit history, and is not without risk; default on the loan could result in losing the home to the creditor. There are two types of home equity loans: closed end and open end. A closed end home equity loan generally has a one-time lump payment up to 100% the value of the house (less any liens) and has a fixed interest rate. An open end home equity loan, also called a home equity line of credit, is a more flexible loan where the interest is variable but the borrower can choose when, how much, and how often to borrow against the equity of the home.

A small business loan is designed to help small business owners develop and expand their small business. Generally, a strong credit history and credit score are needed to obtain a small business loan. The best way to obtain such a loan is through the Small Business Administration (SBA), which assists in obtaining funding through private banks and/or financial institutions. The SBA does not lend directly; rather, it guarantees commercial loans made by participating financial institutions that agree to SBA terms and guidelines. During the application process, the applicant must usually provide a business plan that legitimizes the business and outlines plans for making profit and repaying the loan.

A payday loan, also known as a paycheck advance or payday advance, is a small, short-term loan intended to provide cash only until the borrower’s next paycheck. Working and lower middle classes are the primary borrowers. A payday loan typically is less than $500 and has a high interest rate up to 400% APR. They are often criticised as predatory, and in the US are highly regulated on a state level . In fact, payday lending is either illegal or not feasible in 13 states. It is therefore best suited for emergency situations where immediate expenses must be met before the individual’s next paycheck. Be cautious of APR vs. EAR (effective annual rate), and be aware that extended payment plans are a mandatory option to protect borrowers. General requirements to obtain such a loan include proof of a steady source of income (i.e. paystub) as well as recent bank statement.

For individuals with a poor credit history, a bad credit loan could be key to financial rebuilding and the repair of bad credit. There are a wide range of lenders who specialize is lending to those with histories of bad credit, though interest rates are characteristically high due to the higher inherent risk of lending. These loans are usually subject to additional limitations, such as lower loan amount and restrictions on repayment. To individuals with a poor credit history of credit score, a bad credit loan could be an excellent opportunity to build good credit. As with all loans, however, proceed with caution, and be particularly aware of high interest rates and hidden fees which could add up quickly.