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Understanding the different types of loans

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Serious couple discussing paper documents, checking bills, bank account balance, terms of contract, loan agreement

If you need to borrow money, you can apply for a loan from a licensed lender. Banks, credit unions, and state-licensed lenders offer loans of various types, such as auto loans, mortgages, and student loans.

These financial products help you pay for certain expenses. They let you buy what you need right now, rather than waiting until you have enough money saved up. Once you get a loan, you pay it back gradually with scheduled payments.

There are many different types of loans, each created for a specific purpose. If you don’t know which loan type is right for you, this article is here to help. We’ll explain the different types of loans so you can find the best one for your situation.

Here’s what we’re going to cover:

Key takeaways:

  • Loans allow you to borrow money from a licensed lender. After you receive your money, you’ll be expected to pay back the loan, as well as its interest and fees, in scheduled payments.
  • There are many different types of loans you can apply for. Each loan is made for a specific purpose. The most common types are personal loans, auto loans, mortgages, student loans, small business loans, and payday loans.
  • The best type of loan is one that you can afford. To choose the best loan for your needs and budget, make sure to do your research. Look for a lender that offers low interest rates and affordable payments.


How do loans work?

If you want to take out a loan, you must be approved by a lender. Lenders will review your loan application to assess whether or not they think you will pay them back on time. If you get approved, you’ll receive money to pay for your needs.

After you receive the loan, you’ll have to start paying it back with scheduled payments. You’ll have to repay the amount borrowed as well as any interest and fees charged by your lender for borrowing money.

Basic loan terms

Every loan has a set of terms that are listed in your loan agreement. These terms may include:

  • Principal (the amount of money you’re borrowing)
  • Acceptable uses for the loan
  • Interest rate
  • Fees
  • Loan term (the amount of time you have to pay back what you borrow)
  • Annual percentage rate (APR)
  • Collateral requirements
What is collateral?
Collateral is something of value that you agree to give your lender if you fail to make your payments on time. With an auto loan, the collateral is usually your car. With a mortgage, the collateral is typically your home.

Now let’s take a look at some common types of loans.

Personal loans

Personal loans can be used to pay for a wide range of personal expenses, including:

  • Medical bills
  • Home improvements
  • Car repairs
  • Big purchases
  • Vacations or weddings
  • Money owed to friends or family
  • Debt consolidation

Personal loans usually have a few use restrictions. For example, they can’t be used for expenses related to business or education.

Many personal loans don’t require any collateral, but secured personal loans do. It can be easier to get approved for a secured personal loan, especially if you have a low credit score.

What is a credit score?
Your credit score is a number between 300 and 850 that gives businesses an idea of how likely you are to make payments on time.


Auto loans

Another common type of loan is the auto loan. Unlike a personal loan, which can be used for many purposes, an auto loan can be used to purchase a car or refinance an existing auto loan.

A car is one of the biggest purchases you’ll ever make. Auto loans make this purchase possible, even if you don’t have the full cost of a car saved up. You can pay off your new car while you’re using it and enjoying it on the road.

Auto loans are a type of secured loan, which means they require collateral. That collateral is usually the car that you’re financing with the auto loan. If you fail to make payments, the car could be repossessed.


For many people, buying a home is a lifelong goal. But very few people can afford to pay for a house all at once. A mortgage allows you to spread house payments over many years, making home ownership possible.

You usually need to pay a percentage of the home’s selling price up front. This cost is called the down payment. Down payments can be up to (or even more than) 20 percent of the home’s price, but may be much less, depending on the type of mortgage you qualify for. After the down payment, you make scheduled payments until the whole mortgage is paid off.

Your lienholder technically owns your home until you make the final mortgage payment. If you fall behind on payments, you risk facing foreclosure, meaning the lender can repossess your home.

There are three main types of mortgages.

Student loans

Student loans can be used to pay for education-related expenses, including:

  • Tuition
  • Student housing
  • Textbooks
  • Transportation
  • Computers

A student loan is often the first loan a person will ever take out. That’s because student loans are commonly used to pay for college education.

Most student loans don’t require you to make payments until after you graduate. Some student loans even give you a few months to find a job before you begin paying back the loan.

Small business loans

Small business loans give business owners the cash flow they need to improve or expand an existing business. They are also a helpful tool for people who want to start a new business.

Small business loans can be used to pay for business expenses, including:

  • Day-to-day business operations
  • Business-related property
  • Business equipment

To apply for a small business loan, you usually need to submit a formal business plan explaining how you intend to use the money. Some small business loans also require a personal guarantee, which is a promise you make to repay your loan with your personal assets if you fail to make your payments on time.

Payday loans

Payday loans can be used for just about any expense. They’re also very easy to qualify for. Most payday lenders don’t even look at your credit score when you apply for a loan. They only require that you:

  • Be 18 or older
  • Have a valid ID
  • Have a bank account
  • Have a job

If you fail to pay back the loan by your next payday, your loan may be automatically renewed. This new loan will be for the amount of your previous loan plus its unpaid interest and fees. Since payday loans can have APRs of up to 400 percent, this can become very expensive very quickly.

Because they are so costly, payday loans have earned a bad reputation. They should only be used when money is not available from any other source. A personal loan is a much better option if you can qualify for one.

Oportun: Affordable personal loans

Now that you understand the different loan types available, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about:

  • Personal loans
  • Secured personal loans
  • And more


Consumer Financial Protection Bureau. Mortgages key terms

Federal Housing Finance Agency. About Fannie Mae and Freddie Mac

U.S. Department of Housing and Urban Development. The Federal Housing Administration (FHA)

U.S. Department of Veterans Affairs. VA home loans

Consumer Financial Protection Bureau. CFPB finds four out of five payday loans are rolled over or renewed


The information in this site, including any third-party content and opinions, is for educational purposes only and should not be relied upon as legal, tax, or financial advice or to indicate the availability or suitability of any Oportun product or service to your unique circumstances. Contact your independent financial advisor for advice on your personal situation.

Personal loans through Oportun subject to credit approval. Terms may vary by applicant and state and are subject to change. If you refinance, you may pay interest over a longer period of time or at a higher rate and the overall cost of your loan may be higher. Loans in CA, ID, MO, NM and WI are originated by Oportun, Inc. California loans made pursuant to a California Financing Law license. NV loans originated by Oportun, LLC. In AL, AK, AR, AZ, DE, FL, GA, HI, IL, IN, KS, KY, LA, MI, MN, MS, MT, NC, ND, NE, NH, NJ, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VA, VT, WA and WY loans are originated by Pathward®, N.A.. Terms, conditions, and state restrictions apply.

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