Education. A new car. Starting a business. Home renovations. Many types of loans are available to help pay for some of the more expensive things in life. Understanding a few borrowing fundamentals can help you choose the right one for your needs. Let’s dive in.
In general, there are two main categories of loans: installment and revolving. An installment loan is usually repaid in equal payments over an extended period of time. Common examples include fixed-rate mortgages and loans for autos and education. Another type of installment loan is BNPL or “buy now, pay later,'' which is also split into equal payments but typically over just a matter of months.
A revolving loan is also called a revolving line of credit. It lets a consumer make unlimited purchases up to a pre-approved amount. Credit cards and home equity lines of credit are common examples of this type of loan.
Student loans, for example, are often unsecured, which means they do not require collateral. With secured loans, a consumer pledges collateral (meaning, they have some property at risk) to secure repayment. Again, mortgages and auto loans are typical examples. If the loan payments aren’t kept up, the property might have to be forfeited.
No matter the loan purpose or the type of loan you choose — installment or revolving; secured or unsecured — consider the rates, fees and conditions. Create a list of your options.
For example: An auto loan may be an option if you are buying a new car. It would be secured by the car and could be offered by a dealership or third party. Auto loans often require sizable down payments.
Or, if you don’t have the cash on hand for that, you could look at a personal loan instead. Since personal loans are unsecured, they sometimes come with a higher interest rate, but there are plenty of options even for those with lower scores. Be sure to shop around.
Another consideration is the type of interest offered. Does a simple (based on the loan amount) or compound (based on interest plus the loan balance) interest loan better meet your financing needs? Does it make sense to look for a fixed (does not change) or adjustable (goes up or down with the market) rate loan? While fixed-rate loans offer lower risk in terms of interest rate increases, they often come with higher interest rates.
One common mistake when comparing options and securing a loan is to think too narrowly. While it is important to look at monthly payments, there are many other things to consider. Factors such as loan types, length and interest options can greatly affect the impact borrowing the money will have on your overall financial situation – both now and for years to come.
Whatever type of loan you are considering, be sure you know the type, repayment obligations and total cost before deciding.
This page and the information contained herein is for educational purposes only. The information is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any product, service, or strategy to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional. Any links to other websites are included for your convenience only. Bread Financial does not endorse any product or service, and is not responsible for the accuracy or reliability of the information, made available through such sites.
