April is Financial Literacy Month and to celebrate each week Auburn Savings Bank will be posting a new blog with tips to help you towards financial success. The second blog in the mini-series focuses on understanding different types of loans.
Navigating the world of loans can be overwhelming, especially with the different options available. Whether you’re looking to buy a home, finance your education, or pay off and consolidate debt it is important to choose the correct loan for your needs. This guide will help you understand the different types of loans so that it is easier for you to determine what kind of loan you may need in the future.
Personal Loans
Purpose: Personal loans are flexible and can be used for many purposes such as consolidating debt, covering medical expenses, or funding home improvements.
Features:
Unsecured: Most personal loans do not require collateral such as a car, making them unsecured loans.
Fixed or Variable Interest Rates: Some personal loans give you the option of choosing a fixed interest rate that stays the same for the life of the loan, or a variable interest rate that can change throughout the life of the loan.
Repayment Terms: The length of a personal loan typically ranges from 1 to 7 years.
Benefits: Personal loans are typically flexible making it easy for you to use the funds for almost any purpose.
Considerations: Interest rates are often higher for personal loans because they are unsecured making them a riskier type of loan.
Auto Loans
Purpose: Auto loans are specifically for purchasing a new or used vehicle.
Features:
Secured: Auto loans are secured loans because the vehicle being purchased serves as the collateral.
Fixed Interest Rates: Most auto loans have fixed interest rates meaning the interest rate you agree to at the beginning of the loan stays the same for the life of the loan.
Repayment Terms: The length of an auto loan typically ranges from 3 to 7 years.
Benefits: Auto loans typically have lower interest rates since they are secured.
Considerations: When acquiring an auto loan be sure to pay attention to the loan-to-value ratio since vehicles tend to lose value quickly.
Mortgages
Purpose: Mortgage loans are used to finance the purchase of a house.
Features:
Secured: Mortgages are secured loans since the home being purchased is used as the collateral.
Fixed or Adjustable Rates: With mortgage loans you can choose between a fixed-rate mortgage or an adjustable-rate mortgage.
Long Repayment Terms: The length of a mortgage typically ranges from 15 to 30 years.
Benefits: Having a mortgage enables you to own a home and build equity in that home over time.
Considerations: Mortgages are typically long-term loan with significant responsibilities associated with them. It is important to understand all of the features of a mortgage ahead of getting one.
Student Loans
Purpose: Student loans are specifically designed to help finance education-related expenses such as tuition, books, and residential costs.
Features:
Federal or Private: Student loans can be federal loans that offer benefits such as specialized repayment plans or private loans that are offered by banks and other lenders.
Fixed or Variable Rates: Federal student loans usually have fixed rates while private student loans may have variable rates.
Deferred Repayment: Payments for student loans are typically deferred until after graduation.
Benefits: By having a student loan it makes it possible for you to attend higher education to achieve your future life goals.
Considerations: Student loans can result in a significant amount of debt that may take many years to pay off.
Home Equity Loans and HELOCs
Purpose: Home Equity loans and HELOCs are loans that allow homebuyers to borrow against the equity in their homes. Typically, someone will have one of these loans to use the funds for home improvement projects or debt consolidation.
Features:
Secured: Home Equity loans and HELOCs are secured loans because the house is used as collateral.
Fixed or Variable Rates: Home Equity loans usually have fixed interest rates, while Home Equity Lines of Credit have variable interest rates.
Lump Sum or Revolving Credit: Home Equity loans provide a lump sum to the borrower while Home Equity Lines of Credit offer a revolving line of credit.
Benefits: The secured nature of these loans often means the interest rates are a little lower and the interest paid on these loans may be tax-deductible.
Considerations: If you end up with a loan that has a variable interest rate it may result in higher payments if interest rates rise during the life of the loan.
Choosing the right loan depends on your financial needs and goals. By understanding the different types of loans and their features, making an informed decision should be easier for you and your family. At Auburn Savings Bank we are here to help you figure out which loan works best for your financial situation. Reach out to one of our loan officers today to get the guidance you need to set yourself up for your future financial goals.
This blog is for educational purposes only and should not be used as financial advice. Come inside and visit a branch, and one of our Loan Officers will be happy to assist you. At Auburn Savings, we nurture relationships, foster ambition, and are driven by purpose—You Come First. Bank On Us™.