Types of Loans
Loans can be a helpful resource as you work toward achieving goals like buying a car, owning a home, pursuing your education and more. There are loan products from a variety of lenders that will suit almost every situation and need. It may be difficult to decipher all the different types of loans and their terms. Expand your loan knowledge with these basic loan terms.
Federal or private
Federal loans are granted from the federal government, typically in the form of student loans. Federal loans have lower interest rates, deferment options and grace periods that typically make them more affordable.
Private loans are granted based on your creditworthiness by lenders like credit unions, banks or brokers. Examples of private loans include mortgages, auto loans and debt consolidation loans that have interest rates that change over time.
Personal or commercial
A personal loan is a loan granted for personal use like covering a medical bill, financing a renovation or consolidating debt.
A commercial loan is a loan granted for business use like purchasing equipment and inventory, expanding a business or moving into a bigger space.
Secured or unsecured
A secured loan is a loan that has collateral attached to it. Collateral is a valuable asset like a house or car that a lender can seize if a borrower fails to repay their loan. Because the collateral reduces the amount of risk to the lender, secured loans typically offer larger loan amounts at a lower interest rate.
Unsecured loans do not require collateral. Examples of unsecured loans include credit cards and personal loans. Unsecured loans may come with higher interest rates than a secured loan.
Fixed rate or variable rate
A fixed rate loan is a loan in which the interest rate stays the same throughout the entire term of the loan. Because of this, the loan may have a higher interest rate to compensate for rates rising in the future. A benefit of fixed rate loans is that their payments are consistent and easy to budget for.
A variable-rate loan is a loan where the interest rate changes over time based on an economic index. These types of loans tend to have lower interest rates initially since they are expected to rise over time. Variable-rate payments are unpredictable and more difficult to budget for.