Loans provide you with money you might not currently have for large purchases, and let you pay back the money over a stated period of time. Many loan types are available, such as home loans, car loans, and student loans. Loans are either secured or unsecured.
With secured loans, your property is used as collateral. If you cannot repay the loan, the lender may take your collateral to get its money back. Common secured loans are mortgages, home equity loans, and installment loans.
A mortgage loan is used to buy real estate, such as a home. Fixed-rate and adjustable-rate mortgages are the two main types of mortgages, but there is a wide variety of mortgage products available. Typical sources for mortgage loans include credit unions, commercial banks, thrift institutions, mortgage brokers, and online lenders. When shopping for a home mortgage, you should consider contacting several lenders to compare offers.
If you don’t make your mortgage payments when due, foreclosure proceedings may occur. This action provides the legal means for your lender to take possession of your home. Foreclosures have a negative impact on your credit history. Beware of predatory mortgage lending (opens new window), where creditors impose unfair or abusive terms on you. Deceptive mortgage lending practices can strip you of home equity and threaten foreclosure.
For more information, refer to the Looking for the Best Mortgage (opens new window) booklet by the U.S. Department of Housing and Urban Development. Tips on avoiding mortgage relief scams (opens new window), and where to get legitimate help, are available from the Federal Trade Commission (FTC).
Home Equity Loans
A home equity loan is a form of mortgage loan where your home is used as collateral to borrow money. It's typically used to pay for major expenses (education, medical bills, or home repairs). These loans may be a one-time lump sum amount, or a more flexible revolving line of credit allowing you to withdraw funds at any time. In either case, if you cannot pay back the loan, the lender could foreclose on your home.
For further information, read What You Should Know about Home Equity Lines of Credit (opens new window), a guide published by the Federal Reserve Board.
With an installment loan, you repay the loan over time with a set number of scheduled payments. Car loans are the most common installment loans. Before you sign an agreement for a loan to buy a car, or other large purchase, make sure you fully understand all of the lender's terms and conditions.
In particular, know the dollar amount you are borrowing, payment amounts and when they are due, total finance charge (including all interest and fees you must pay to get the loan), and the rate of interest you will pay over the full term of the loan. Be aware of penalties for late payments, or for paying the loan back early. Know what the lender will do if you cannot repay the loan.
Lenders are required by federal law (opens new window) to provide this information before you agree to make the purchase, so you can compare different offers.
Unsecured loans do not use property as collateral. Lenders consider these to be riskier than secured loans, so they charge a higher rate of interest for them. Two common unsecured loans are credit cards and student loans.
Credit cards allow you to purchase products and services now, but you need to repay the balance before the end of your billing cycle to avoid paying interest on your purchase. The credit card issuer sets a credit limit on how much you can charge on your card. When applying for credit cards, it's important to shop around. Fees, interest rates, finance charges, and benefits can vary greatly.
For further information, visit the FTC’s consumer information on Credit, Debit, and Charge Cards (opens new window). Tips to help you choose the right credit card (opens new window) are also available from the Consumer Financial Protection Bureau (CFPB).
Student loans are available from a variety of sources, including the federal government, individual states, colleges and universities, and other public and private agencies and organizations. To help pay for higher education expenses, students and parents can borrow funds that must be repaid with interest. As a general rule, federal loans have more favorable terms and lower interest rates than traditional consumer loans.
You can learn the differences between federal and private student loans (opens new window) from the U.S. Department of Education. The CFPB has a Paying for College (opens new window) tool that lets you compare costs and financial aid offers from up to 3 different schools.
(Adapted from USA.gov article)