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Home Equity Credit
Home-Equity Lines of Credit
Cash Advances on Credit Cards
Small Business Loans
Personal Finance Lending
Understanding Different Loan Types
Choose the one which best fits your financial situation
By Glenn Curtis
Updated June 19 2021
Reviewed by Thomas Brock
Money borrowed can be used for many motives, from financing a new business to buying your spouse an engagement ring. But with all of the various types of loans out there, which is best–and for which purpose? Here are the most popular kinds of loans and how they function.
The most important takeaways
Individual loans as well as credit cards are characterized by the highest interest rates, however they do not require collateral.
Home-equity loans have low interest rates, but the borrower’s home is used as collateral.
Cash advances typically come with high rates of interest and transaction costs.
Many banks, both online or located on Main Street, offer personal loans, and the proceeds may be used for virtually everything from purchasing a brand new 3D 4K smart TV to paying bills. It’s a costly method to borrow money, as the loan is unsecured, which means the borrower isn’t required to provide collateral that could be taken in the event of default, like the case of a car loan or mortgage on a home. In general, a personal loan can be obtained from a few hundred dollars to thousands of dollars, with repayment periods of two or five years.
Borrowers need some form of income verification as well as evidence of assets that are that are at least as large as the loan amount. The application typically is only a few pages in length. The decision to approve or deny the application is usually granted within a few days.
The Best and Worst Rates
The average rate of interest for a 24 month commercial bank loan was 10.21 percent for the quarter ending in April of this year, as per the Federal Reserve.1 But , the rates can be three times or more the amount. For example, Avant’s APRs range from 9.95% to 35.99%.2 The most favorable rates are only available by those who have outstanding credit ratings and substantial assets. The most adversities must be endured by those who are left with no choice.
Personal loan is probably the best method for those who have to borrow a relatively small amount of money and know that they will repay the loan within a couple of years. An online personal loan calculator is useful in determining what kind of interest rate is within your means.
Bank Loan vs. Bank Guarantee
An institution’s loan cannot be the same as a bank’s guarantee. A bank can provide a guarantee as a surety to a third party in the name of one or more of its clients. If the customer is unable to perform the required contract with this third-party, that party can demand an amount from the bank.
The guarantee is generally an arrangement that banks make for their small-business clients. A company may agree to an offer from a contractor, for example, on the condition that the bank of the contractor offers a payment guarantee in the event that the contractor defaults in the terms of their contract.
A personal loan is a good option for those who have to borrow a relatively small amount of money and is certain of their capability to repay it within a couple of years.
Every time a consumer pays with a credit card it’s equivalent to taking out a personal loan. If the balance is paid off in full in the first day there is no interest charged. If a portion of the debt is still unpaid, interest is charged every month until it is completely paid off.
The average credit card interest rate carried a 16.88 percent APR as of the close in the 4th quarter the year, according to a the Federal Reserve–down slightly from the 2019 second quarter rate of 17.14 percent, but almost exactly the same as it was (16.86 percent) at the end in the 4th quarter 2018.3 Penalty rates for those who fail to make one payment, could be increased further, for instance the rate is 31.49% on at least two HSBC Mastercards.4
The major distinction between a credit card as opposed to a private loan can be seen in the fact that the card is a revolving debt. The card is governed by a credit limit and the owner is able to borrow money up to that limit, and repay it over time.
Credit cards are very convenient, and they require self-discipline to avoid overindulging. Research has shown that people are more likely to spend money when they use plastic instead of cash. The simple application form of one page makes it an even easier way to secure the $5,000 or $10,000 worth of credit.
Homeowners who own their own residences can borrow against the equity accrued in the properties. That is, they can take out loans up to the amount they actually own. If the mortgage is half is paid off, they may borrow the entire worth of the property or if the property has appreciated by 50%, they are able to borrow that amount. The difference between the home’s current actual market price and amount still due for the loan is how much is able to be borrowed.
Lower Rates, Higher Risks
The benefit of a home equity loan is that the interest rate charged is significantly lower than personal loan. According to a study conducted by ValuePenguin.com, the average rate of interest for a 15-year fixed-rate home equity loan as of Feb. 5th, 2020, was 5.82 percent. As a result of changes made in the legislation of 2017 Tax Cuts and Jobs Act, interest on a home equity loan is now only tax-deductible when the money will be utilized to “buy or construct, or substantially enhance the taxpayer’s home that secures the loan” as per the IRS.5
The biggest potential downside is the fact that the house serves as used as collateral to secure the loan. The borrower can lose their house in the event in default on the loan. The money from the house equity loan can be used for any purpose however, they are typically used to renovate or expand the home.
A consumer considering a home-equity loan could be reminded of two lessons from the financial crisis of 2008-2009:
The value of homes can fall as well as up.
Jobs are in jeopardy in the economic downturn.
Home Equity Lines of Credit (HELOCs)
The home equity line of credit (HELOC) is similar to credit cards but utilizes your home to secure. An amount up to a certain amount can be given to the borrower. A HELOC is able to be used to repay, or used again until the time that it remains in good standing, which usually is 10 to 20 years.
Similar to a traditional home equity loan it is possible that the interest will be tax deductible. However, unlike a traditional home equity loan the interest rate isn’t set at the time the loan is approved. As the borrower may be accessing the money anytime over a long period and the rate of interest will be variable. It may be pegged to an underlying index like that of the prime rate.
Good or Bad News
Variable interest rates could be good as well as bad. During a period of rising rates, the amount of interest charged for outstanding balances will rise. If a homeowner takes out loans to build a kitchen, and then repays it over the course of a few years, for instance, may be forced to pay more in interest than they anticipated simply because the prime rate went up.
There’s a second risk. The lines of credit available can be very large, and the introductory rates can be very attractive. It’s not difficult for customers to get in over their heads.
Credit Card Cash Advances
Credit cards typically have a cash advance feature. In essence, anyone with an account with a credit card can access an revolving cash line available at any automatic ATM (ATM).
This is an extremely expensive way to borrow money. To take one example of interest rates, cash advances on Fortiva credit card is Fortiva credit card ranges from 25.74 percent between 36% and 25.74%, contingent on the quality of your credit.6 Cash advances also come with a charge, which is typically equivalent to 3 to 5% of the advance amount or a $10 minimum. The worst part is that the cash advance goes onto the balance of your credit card, accruing interest month after month until it is cleared.
Cash advances can be obtained from different sources. Notably, tax-preparation companies may offer loans against the expected Internal Revenue Service (IRS) tax refund. However, unless there’s a critical emergency, there’s not a reason to forfeit a part or all of the tax rebate just to get the money a little faster.
Small Business Loans
Small-scale business loans are offered through a variety of banks and through the Small Business Administration (SBA). These are typically sought by people setting up new companies or expanding existing ones.
Such loans are only granted once the owner of the business has submitted a formal business plan for review. The terms of the loan usually include personal guarantees, which means that the owner’s personal assets serve as collateral against default upon repayment. The loans generally are extended for a period of between five and 25 years. The interest rates can be negotiated.
The small-business loan has proved indispensable for the majority, if not all, fledgling businesses. However, the process of creating a business plan and getting approval for it can be challenging. The SBA offers a variety of resources both local and online to assist companies get their businesses up and running.
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Personal Loan Guide to Personal Loans
Personal Loan: Definition, Types, and How To Get One
1 of 33
Understanding Different Loan Types
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3 of 33
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What Is Peer-to-Peer (P2P) Lending? The definition and the way it operates
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What Is a Payday Loan? How It Works, How to obtain One and Legality
6 of 33
Personal Loan Calculator
7 of 33
Can Personal Loans be tax-deductible?
8 of 33
Are personal loans considered income?
9 of 33
Can Personal Loans Be Included in Bankruptcy?
10 of 33
Can Personal Loans Be Transferred to another person?
11 of 33
How Personal Loans Affect Your Credit Score
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What is an Amortization Schedule? How do you calculate it using Formula
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Personal Interest Rates on Loans: How a Personal Loan Is Calculated
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How to Apply for Personal Loans
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Best Personal Loans
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Best Small Personal Loans
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Best Bank Loans
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Best Peer-to-Peer Lending
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Personal loans with low interest loans
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Best Personal Loans Online
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Best Loans for Bad Credit
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The Best Loans for Fair Credit
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best personal loans for those with good credit
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The Best Loans for Outstanding Credit
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Best emergency loans for bad Credit
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Debt Consolidation Loans for Bad Credit
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The Best Consolidation Debt Loans
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Best Home Improvement Loans
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The Best Personal Loans with a Co-Signer
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Personal Loans vs. Credit Cards What’s the difference?
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Personal Loans are different from. Car Loans: What’s the Difference?
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8 Ways to raise more cash than Car Title Loans
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What is Debt Consolidation? Benefits, Risks and an Example
Debt consolidation is combining several loans into one loan usually with a lower rate of interest. Learn about how debt consolidation could reduce your expenses.
The signature loan is a personal loan offered by banks and other finance companies which is dependent on the signature of the borrower and promise to pay as collateral.
Prime Rate Definition
Prime rate refers to the interest rate commercial banks demand from their highest good customers.
Collateral Definition, Types, & Examples
Collateral is an asset that lenders accept as security to extend an loan. If the borrower is in default the lender can take possession of the collateral.
How to use Home Equity? it Is, How It Works, and How You Can Utilize It
Home equity is the calculation of a home’s market value minus any liens that are attached to the home.
What is a mortgage? Types, how they work and some examples
A mortgage is a loan used to purchase or keep real property.
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