A loan sounds simple enough in concept. Someone gives you money, you repay it eventually. But life’s never that simple. Most loans are separated by purposes such as mortgages, business loans, personal loans, or even more. Naturally, the ins and outs can get complicated.
We’re here to help. Below, we will break down the most common types of loans, which will allow you to figure out which one suits your purposes best.
Mortgages
A mortgage is the best way for anyone whose father isn’t Jeff Bezos to own their own house. Arrive at your lender with a good credit score, little debt, and a deposit, and you’ll be given a loan that you will repay in monthly installments. It usually comes out to a lot less than renting for a much better home. Simple, right?
It sounds like a good deal, but if you’ve watched the news lately, you’ll know that saving for a house isn’t all that easy in the current market.
The biggest hurdle is the deposit. If you get all your ducks in a row, wipe your debt, build your credit score, and finally determine how much you need to save for a downpayment, you might still be taken aback. The standard is 10% of the asking price of the house, but when the average price of a house in America is in the $400,000 range, that’s a big ask.
Personal Loan
A personal loan has the biggest benefit in that it can be used for absolutely anything. You are simply given a lump sum and left to repay the money in installments. As long as you are repaying the personal loan, your lender won’t care. However, you need to avoid defaulting by keeping a keen eye on things. Take into account the interest rate, the fees, the repayment terms, and the borrowing limits to make sure you can afford what you are taking out. You might also want to look into who you are borrowing from when you are online. There are a lot of predatory scams out there.
This is a great option for someone who has a big expense coming up, like planning a dream wedding, covering funeral costs, or home renovations. It can even be useful when it comes to debt. Rather than having lots of debt problems with varying rates of interest, pay them all off with a personal loan and work on paying off the personal loan instead.
401k
Whilst a personal loan can be advantageous, another option is to borrow from your 401k. If you are having trouble raising the funds you need for an endeavor now, you can dip into savings that you’ve put aside for the future.
You won’t be able to take the funds outright, but you can contact your supplier to ask about a loan. Depending on the community property rules, you might need your spouse to sign off on it, but you can borrow as much as 50% of your account balance, which is capped at $50,000.
The money will be liquidated from your investments and will then be deposited into your bank account or sent to you via cheque.
This is a good option for people who perhaps need a payday loan. You can avoid the predatory fees of payday loans that destroy credit scores and offer horrendous interest rates and instead repay yourself over time. It’s also good for other types of debt that might be pulling down your credit score. You can clear your debt and rebuild your 401k with better rates and terms from another lender. But keep in mind that most 401k loans expect you to repay them within 5 years.
It’s also a good option for someone looking to buy a house but can’t get the downpayment together. That 5-year limit to repay the loan then extends to 25 years.
Business Loan
Unfortunately, the old adage of spending money to make money is true. Just about everything has an up-front cost and unless you have inherited some money, you’re going to need a business loan.
There are many types of business loan, but the option of debt financing is the simplest. It means the lender has no say over how you spend the money, but that you also hold all the risk. However, the interest you pay is tax-deductible and the monthly payment can be included in your forecasting models as an expense.
Equity financing is the sort of deal you’re likely to be familiar with if you’ve seen shows like Shark Tank. Investors are putting forward the money for a share of your business. It’s usually a firm, rather than one person, but you won’t have to pay back the money and you’re likely to have someone who understands how long it takes to build a business and will be patient to see results, however, you will need to come to terms with the fact that you have a new partner you don’t know very well.
