Types of Loans: Personal, Student, Home, Auto & More
Major types of loans include personal loans, home loans, student loans, auto loans and more. Each is helpful for a different purpose, and has different terms and requirements. For example, personal loans can be used for anything, last for 1 to 7 years, and have APRs ranging from 6% to 36%. Student loans, in contrast, can only be used for college, last for 10 or more years and have APRs ranging from 5% to 14%. Each type of loan is unique.
There are even some loans that are predatory and not worth pursuing, like payday loans and auto title loans. But they are still important to know about. Below, you can learn about all the different types of loans that are available in detail.
Types of Loans:
- Personal loans
- Auto loans
- Student loans
- Mortgage loans
- Home equity loans
- Credit-builder loans
- Loans from friends/family
- Payday loans
- Auto title loans
- Pawn shop loans
These loans have vastly different APR ranges, dollar amounts and payoff timelines. Some are secured by collateral, such as home equity loans and auto title loans. Others are unsecured, like student loans and most personal loans. In addition, some have a wide range of uses, while others only pay for certain expenses.
One thing most loan types have in common is that the borrower gets a lump sum upfront and pays it off over time. But there are even exceptions to this, such as credit-builder loans.
Different Types of Loans Explained
Personal loans are among the most versatile types of loans, providing funds for pretty much any purpose, as long as it’s not illegal. Individual lenders may put restrictions on what their loans can be used for. For example, you generally can’t use a personal loan for college education.
Some lenders may offer numerous personal loan options for different purposes (like medical bills, debt consolidation or weddings), each with its own APR range. LightStream by SunTrust Bank is one example. However, the vast majority of personal loan providers offer loans with nearly limitless uses.
- Typical loan length: 12 to 60 months (sometimes 84+)
- Typical APR range: 6% to 36%
- Minimum loan amounts: $1,000 to $3,000
- Maximum loan amounts: $25,000 to $100,000
- Credit score required: 600 to 700 (average of 660)
- Collateral: Required for secured personal loans, not for unsecured loans
Auto loans allow borrowers to pay off a vehicle over time. They are typically secured by the car being financed, meaning that if the borrower does not make their payments, the lender can repossess the car to get its money back. Auto loan rates depend on both whether the vehicle is new or used and how long the loan lasts for.
- Payoff timeline: 24 to 72 months
- APRs: 3% to 7%
- Credit score required: No minimum, but better scores get better terms
- Consequence for not repaying: Vehicle repossession
It’s also good to note that people can take out loans for pretty much any other type of vehicle, too, including boats, aircraft and more.
Student loans pay for education and education-related costs. That includes school tuition, housing, food, textbooks, transportation and more. These loans are not supposed to be used for costs unrelated to school, though lenders do not monitor how the money gets spent.
- Payoff timeline: Usually 10 years, up to 25 for $30,000+ in some cases
- Sources: Private companies and the federal government
- APRs for federal student loans: 5% to 8%
- APRs for private student loans: 4% to 14%
- Forgiveness: Possible after 10 years for public service works, 20 - 25 years for others
Mortgage loans allow people to purchase a house without having enough money to pay for it all upfront. With a mortgage, the borrower can live in their home before they’ve paid the full price for it. But the financial institution that issued the loan owns the house until the mortgage gets fully paid off. Mortgages are secured by the house in question.
- Length: 10, 15, 20 or 30 years
- APRs: 3% to 6%
- Credit score required: 620 for private, 580 for government-insured
- Sources: Private companies, government (FHA, VA, USDA)
Home Equity Loans
Home equity loans are just as versatile as personal loans. Borrowers can use them for just about anything. The amount of money that a borrower can take out depends on the equity in their home, which is the house’s worth minus the balance left on the mortgage. Depending on those values, a home equity loan may offer higher dollar amounts than personal loans.
- Loan lengths: 5 to 30 years
- APRs: 4% to 8%
- Credit score required: 680
- Collateral: borrower’s house
- Consequence for not paying: possible foreclosure
Home equity loans are similar to another product called home equity lines of credit (HELOC). Both are secured by your house. The difference is that a HELCO functions like a credit card, in that you can borrow up to a certain amount of money at any time, but aren’t obligated to borrow.
Credit-builder loans are loans for people who don’t need to borrow money but want to establish or reestablish a history of timely payments and thus improve their credit. With a credit-builder loan, a financial institution puts money into a savings account (usually $300 to $1,000). Then, the borrower pays this amount to the lender, plus interest at an APR of 6% to 16%, over 6 to 24 months. The lender reports payments to the credit bureaus each month, which helps to build the borrower’s credit history. At the end, the borrower gets access to the savings account with their funds.
Essentially, credit-builder loans work in the reverse of a normal loan. Instead of getting money and then paying it back in installments, the borrower pays money in installments and then gets a lump sum at the end.
Loans from Friends/Family
It’s possible to get a loan from a friend or family member rather than a financial institution. The major benefit to this is the potential for a low interest rate, or even no interest, along with flexible repayment terms. That, of course, depends on how generous the friend or family member is. But he or she will not have the power to pull the borrower’s credit report directly, and is less likely to care about their credit score.
When borrowing from someone you know, it’s important to draw up and sign a loan agreement so that you can be held accountable for borrowing. And it’s important to take borrowing from this person as seriously as borrowing from a financial institution – doing otherwise would be a breach of trust.
Payday loans are extremely predatory short-term loans that must be paid back with interest when the borrower receives their next paycheck. These loans are usually $500 or less, and the lender will often charge a fee equivalent to a 400%+ APR.
Because the loans are secured by the borrower’s upcoming paycheck, they are available to people who have bad credit. However, due to the enormously high costs, they are absolutely not worth pursuing.
Auto Title Loans
Auto title loans are loans secured by the document that grants legal ownership of a car. The borrower receives 25% to 50% of their car’s value upfront, and then has to pay it back over a short term, usually only 15 to 30 days. If they cannot pay in full within that period, it may be possible to “roll over” the loan for another month in exchange for additional fees.
The costs for an auto title loan can end up being as much as 25% of the loan amount. And if the borrower cannot pay off the loan, the lender can take their car. It’s definitely best to avoid these loans.
Pawn Shop Loans
Pawn shops let people bring in items and receive 20% to 60% of their value in return. The pawn shop takes temporary possession of the item but is not allowed to sell it for a certain amount of time, often a few months. The person who pawned the item can come back at any time during this period and pay off the loan plus interest (which can range from around 2% to 25% per month). If they do, they get their item back. Otherwise, the pawn shop can sell the item to make its money back.
Loans vs Other Types of Borrowing Options
Loans aren’t the only way to borrow. There are several other ways to finance a purchase, or otherwise afford it, such as a credit card, line of credit or gifted funds.
Loan vs. credit card: With a credit card, the cardholder is never obligated to borrow money and only pays interest on balances they carry from month to month. Plus, the card remains open indefinitely.
Loan vs. line of credit: A line of credit is like a credit card without the physical card. The person who opens a line of credit only has to pay interest on what they borrow, and they aren’t obligated to borrow. However, some lines of credit may have a set “draw period” during which the borrower can take out money.
Loan vs. gift: Loans require repayment, while gifts do not. Gifts are taxable, but it’s the person giving the gift who pays the tax. Gift givers only need to report gifts on their taxes if they give more than $15,000 to any individual person/place in a year (e.g. they can give gifts of $10,000 to multiple places without needing to report it). And they likely won’t have to actually pay tax on gifts of $15,000+ because everyone has a lifetime tax exemption on $11.4 million worth of gifts.
Key Stats by Loan Type
|Type of Loan||Auto Loan||Home Loan||Student Loan||Personal Loan|
|Outstanding Balances||$1.30 trillion||$9.40 trillion||$1.49 trillion||$138 billion|
|Median Credit Score||703||759||N/A||N/A|
Source: Latest Federal Reserve data available for 2019
What Type of Loan Should I Get?
While there are many different types of loans available, there is usually one type that will work the best in any given circumstance. Student loans are best for education, auto loans are best for cars, etc. And for miscellaneous expenses like medical bills, debt consolidation and more, personal loans are usually the way to go.
Keep in mind that it’s best to take out a loan only when it’s a necessary expense, such as buying a car or house, paying for medical bills, or refinancing existing debt. Using them for vacations or purchasing big luxury items beyond your means can lead to racking up unnecessary and expensive debt. That won’t be good for your wallet or your credit score.
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