The world of finance is complicated. There are any aspects to each loan, countless pages of terms on each agreement, and a host of different loans, cards, mortgages and forms of credit. But the more you know the easer it gets and the better of a choice you can make, so let’s try to clear some of these complications up as we explain the many types of loans available and answer your questions on them.
What is an FHA Loan?
An FHA loan is a type of mortgage tat is backed by the government and allows you to buy a home with a little as 3.5% down. The Federal Housing Administration, from which the loan gets its name, is a branch of the Department of Housing and Urban Development.
What is a Home Equity Loan?
A home equity loan is a cash loan in which the borrowers use some of the equity in their home. They may take out one of these loans when they are looking to reduce household debt and bills, to pay medical bills or to put children through college.
It allows you to borrow a certain amount throughout the lifetime of the loan, working much like a credit card in that you can take out the money when you need it, with the maximum limit in this case being the value of the equity in your home.
You pay back the loan and the accrued interest over an agreed upon timeframe, much like you would your mortgage. If you do not meet these repayments then your home may be foreclosed.
What is a Secured Loan?
A secured loan is money borrowed against capital you own, such as a house or a car. It gives the lender collateral, because if you fail to make payments then they can take that asset from you.
There is one major obvious disadvantage to these loans, but on the plus side they tend to offer lower interest rates and are therefore cheaper in the long run.
What is a Unsecured Loan?
An unsecured loan is basically the opposite of a secured loan in that it is not secured against any assets. As a result, it means the lender is taking a bigger risk with the borrower and may charge more money and make fewer allowances as a result.
What is a Conventional Loan?
A conventional loan is a mortgage that is not insured by a government agency. The lowest credit score for acquiring a loan such as this is 580, but some lenders require more than 620.
What is a Bridge Loan?
A bridge loan is a short-term loan provided to help the borrower during an interim period, such as when they are buying a house while still awaiting the sale of their old house to go through. This loan is secured against the buyer’s current house incase that sale falls through. It allows buyers to speed up the process of acquiring a new home, making sure they don’t miss out on a purchase because their own sale has yet to go through.
What is a HARP Loan?
HARP is short for “Home Affordable Refinance Program”. It is a refinance program aimed at homeowners who have good credit and have met all of their mortgage payments, but have no equity tied up in their homes. You can visit the site’s official page to learn more.
What is a Jumbo Loan?
A jumbo loan is a large mortgage loan that goes beyond the conforming limit, which can be as high as $636,000 in certain high value areas of the United States.
What is a PayDay Loan?
In theory, a PayDay loan is a payment paid in advance of your payday. If you need money on Tuesday but don’t get paid until Friday then you could take out one of these short-term loans and then pay it back.
In practice, these loans are seen as small, short-term financial fixes for people in serious debt. And because they have very high APRs and penalties, that debt only gets higher. The majority of payday loan borrowers do not use them as advances on an upcoming payday, and that’s why this industry caused so many people so much strife, leading to it become severely restricted in the US.
After this restriction, most of the lenders packed up and moved to the UK where they began shifting APRs of over 3,000% like they initially did here. The UK market is now also wising up though and soon the lenders will be forced to move somewhere else. In many ways, they are the financial equivalent of the tobacco industry, and while the payday loan companies themselves may find that statement harsh, we’re sure there customers will be in agreement with us.
What is a Installment Loan?
An installment loan is one that is repaid over a set time following a set number of repayments. More than one repayment needs to be made for it to qualify as an installment loan, but it can involve many more repayments made over the course of many years.
What is a Stafford Loan?
This is a type of federal student loan available as both subsidized (some interest is covered) and unsubsidized (no interest is covered) loan to undergraduate and graduate students. Read our guide to Types of Student Loans to learn more about federal and private loans.
What is a VA Loan?
A VA is a mortgage loan that is provided by private lenders and is guaranteed by the Department of Veterans Affairs. It offers veterans a chance to purchase properties with a loan that covers the total value of the home (which means no downpayment is required), does not require a high credit score and offers some other benefits.
What is a USDA Loan?
A USDA loan is a mortgage that requires no downpayment and is available to buyers in rural and suburban areas, essentially any developments outside of city limits. There is a minimum credit score requirement of 640 for this loan, and if you have a score greater than this then you might be eligible.
What is a Signature Loan?
A signature loan only requires the borrower’s signature and a promise to pay. It is also known as a “good faith loan”. The lender will take the borrower's credit history and income into account when considering them for this loan.