A consumer loan is any type of loan or line of credit a consumer receiver from a creditor. Common consumer loans are home mortgages, auto loans, credit cards, personal loans, student loans, home equity and HELOC loans.
Types of Consumer Loans
A mortgage is a loan used to purchase a home. Borrowers typically put a small percentage of the purchase price down in cash and the remaining balance is financed through a bank or lending institution.
A mortgage is offered to borrowers who meet certain credit score and income requirements set by the lender. There are many types of home mortgage loans available.
A mortgage will usually have a lengthy loan term of 15 – 30 years because of the large amount that is borrowed. A 30-year fixed-rate mortgage is the most common loan term. There are shorter fixed-rate terms and adjustable-rate mortgage loans also available.
Home Equity Loan
If you have a mortgage and your home is worth more than the mortgage balance then you have home equity. You can use that equity you have in your home to secured a loan called a second mortgage. This loan is secured by your home and comes with low interest rates.
A home equity line of credit, or HELOC, works just like a credit card. You’re given a line of credit and are only charged interest on the amount you borrow.
Personal loans are unsecured loans given to consumers with short loan terms, usually between 18-60 months. Interest rates on personal loans are usually higher than secured loans like home equity loans, but lower than credit cards.
From vacations to starting a business, borrowers can use a personal loan to make any purchase they want.
When you get a new loan to pay off an existing loan is known as refinancing. You can refinance most types of loans but mortgage refinancing is the most common.
There are many reasons one would want to refinance their loan. Usually it is to get a lower interest rate or monthly payment.
You cannot refinance credit card debt but you can do a balance transfer. A balance transfer is when you get a new credit card and transfer the balance from your old cards.
A vehicle is often the second largest purchase most consumers make. It is just not possible for most to pay cash for a depreciating asset like a car. So many people use an auto loan to purchase and finance a car.
Auto loan terms are usually between 36-60 months and have a fixed interest rate. The interest rate will be much lower when purchasing a new car financed from the dealer. Used cars have higher interest rates that are based on the consumers credit score.
A credit card is one of the more popular types of consumer loans. A credit card is a line of credit that you can borrow from and make small monthly payments towards the principle balance.
Interest rates for credit cards are typically quite high, but you are only charged interest on the amount you borrow. If you’re able to pay off the full balance each month you will not pay any interest at all.
Education is expensive, which is why many students get a student loan to pay for college. These loans are sometimes backed by the Federal Government making them easy to qualify for even if you have no credit.
Student loan payments are usually deferred until you complete college. Payments are able to be stretched out of a number of years making the monthly payments relatively small.
Consumer loans are used to finance expensive purchases. Without consumer loans many people would be unable to purchase a home or car.
Students are able to pay for college and not have to repay the loan until they have completed school.
Credit cards are convenient and are a great way to help build credit.
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