There’s no shame in needing a little help sometimes, especially when it comes to finances. Everyone runs into situations where we need more money than we have on hand, or where we need more money than we can reasonably save up for. From the obvious examples, such as buying a house and car or starting a small business, to the more unorthodox reasons like going on vacation or covering a medical bill, there will always be a reason to consider taking out a loan. Loans are the go-to method for getting your hands on a lot of necessary money fast, albeit with long term consequences in exchange for short term gain. In fact, it’s estimated that over 50% of Americans have taken out loans in their lifetime. 

For those who are new to the world of finance, however, loans can be a terrifying unknown in a gigantic pile of brand new responsibilities. There are few reliable resources to help you navigate how they work, or even how two different kinds of loans contrast with one another. School curriculum barely touches the topic these days, and your parents can’t be expected to know every detail of every element of the financial world. This general guide is for those who are just entering adulthood, or for those who haven’t needed a loan until now and never had someone to teach them the ropes. In this article we’ll go over some of the most common ways to borrow money and the unique ways they differ from one another. 

The Basics

There are some elements that nearly all loans have. Understanding these elements is the first step to understanding the different ways a borrower can obtain funds from a lending agency. Because every kind of borrowed money falls under these universal categories, knowing them will help you more easily identify specific types and how they compare with one another. The first thing to understand is the loan’s collateral status. There are two types of collateral consideration: secured and unsecured. Secured loans are those that include a tangible asset of yours, such as your home or car, as collateral. If you fail to make payments or otherwise default on your obligations, the lending entity can seize that asset as compensation. Meanwhile, if the money you borrow is unsecured it doesn’t involve any collateral assets. That almost always means the interest rate is higher, as lending without collateral is a riskier prospect for the lender.

Speaking of interest rates, there are two kinds that you need to be aware of. The first and simplest is a fixed rate. These are exactly what they sound like: interest rates that remain constant during the entire repayment period. Meanwhile, variable rate interest is far more complex and, unfortunately, far more common. These rates fluctuate in response to market forces, changing to match whatever the standard is. This standard, or prime rate, is calculated through means that are far more involved than this article can cover. The important part you need to know is that a variable rate can change, and it almost never changes in your favor. You can find more information here.

Finally, there’s a special kind of borrowing method that you should be aware of that differs drastically from a traditional loan: revolving credit. When you borrow in this way you are allowed a certain amount of credit, and at the end of your billing cycle you may either pay back all that you spent or carry over your debt into the next billing cycle. This is how credit cards function: you are given a limit and may make a minimum payment in lieu of the total amount. Revolving credit is a common way for a borrower to build up their credit score over time. With an understanding of these concepts, we can now begin to discuss the different options you have as a borrower and the different things you can borrow money for. 

Personal Consumer Loans

This is the most flexible option at your disposal, and differs from other kinds in that there isn’t a specific reason you’re required to use the money for. While things like mortgages and small business loans are designed for one purpose, this can be used for anything. The most popular options for this are to use it for weddings, vacations, home improvement projects, or emergency funds. However, there’s no limit to what you could use money borrowed under the personal consumer label for. The tradeoff is that there are no standards for repayment terms. You could have a few years to pay back the money, or you could have a few months. Your interest rate could be either variable or fixed, and there’s no telling which one your bank or lending agency will offer. 

One thing that you can almost certainly count on is that it will be an unsecured loan, requiring no collateral on your end. In older days it was common to put up collateral with considerable equity as a security for this kind of borrowing, but this practice has fallen out of favor in the past several decades. Instead, expect slightly higher interest rates to compensate. If you think that a personal consumer loan could benefit you, go to forbrukslån.no/forbrukslån-kalkulator/ to play around with various repayment options, including terms and interest rates, to determine what you can and can’t afford. 

Student Loans

Aside from mortgages, student debt is the most common and highest valued debt in the United States, and is the center of a massive ongoing crisis. If you find yourself wanting to attend university or other higher education establishment such as trade school, you may be shocked at the price tag. Out of state tuition at the most prestigious schools can be several tens of thousands of dollars per year, and that kind of debt can add up much faster than you’d like. Student loans seem like a great way to make the dream of higher education possible. However, there are several dangers that you must bear in mind before borrowing money to go to school. 

Repaying your student loans is not only difficult, but as you can see at https://www.boredpanda.com/student-debt-loans it might actually be borderline impossible for most people. Thank to high interest rates and stagnating wages, most borrowers are finding it difficult to make enough money to pay back their debts. Graduates are facing the cruel choice of paying back their student debt or paying rent and buying food, especially since high interest rates and high principals are creating a phenomenon called balloon debt. This phenomenon happens when making payments on time still causes the amount you owe to increase. Stories of people paying dutifully on their debt only to find themselves owing even more than when they started are rampant. If borrowing for higher education can be avoided, it should be. 

Mortgages

Mortgages are the only kind of debt that exceed student loans in terms of how common they are and how much money the country owes. Unlike student debt, mortgages are far easier to manage and repay. The word mortgage evokes images of mortal finality, as it derives from the French phrase “contract until death.” For many, this can seem like an appropriate description, as terms can last decades before the home is paid off. However, for the majority of people this is the only available road to home ownership. While it can be argued that a college degree isn’t necessary to make it, everyone needs a place to live. Fortunately, mortgage contracts are usually fairly uniform, and you can generally expect a few features across any of them. This uniformity can help you get your bearings before you even go in.

For one thing, mortgages are universally secured loans. The collateral is the home itself, which the bank or lending agency can repossess if you default on your loan. Interest rates are almost always variable, but sometimes can be fixed for a term before switching to a variable rate. Unlike other kinds of loans, these are sometimes backed by the United States government, and borrowers can sometimes qualify for mortgages through government agencies. This can enable people who otherwise wouldn’t be able to qualify for a mortgage to do so. These are overseen by the Federal Housing Administration, though military veterans can also qualify through the Office of Veteran Affairs.

Previous articleReasons You Should Consider Opening a Restaurant Franchise

Eric Hammer is a personal finance expert and writer based in Washington state.

Eric graduated from Excelsior College, a distance learning school accredited by the Middle States Association and the New York State Board of Regents (the same organizations that accredit Columbia University, New York University, Cornell University, etc.).

Eric actually held lots of different jobs, including such varied positions as a sales clerk, paralegal, surveyor’s assistant, community rabbi and English teacher, to name just a few.

He has since learned how to manage money wisely and uses his experience to help others make smart financial decisions. Today, his work appears on sites like Demand Studios and Bright Hub.