Different Loan Options and Their Requirements

There are many reasons that people apply for a loan. You may need a loan to buy a home or car, to cover tuition or medical expenses, or simply to pay off an outstanding debt. Whatever your reason, there are a wide range of loans available and understanding the differences and requirements for approval will save you time and energy.

Mortgage

A mortgage falls into a closed loan. This type comes generally from a bank, a sub lender, or through the government in the form of an FHA or VA loan. Mortgages offered through a traditional bank have higher standards and requirements that you must meet in order to get an approval. They require a credit score on the high end of the 600s but mostly prefer people with a credit score that exceeds 700.  If you go through a sub lender or the government, you can qualify for a home loan with a score of 580 or more.

Home equity loan

A home equity loan is a loan available to homeowners who have equity in their home. There are two types, a straight home equity loan and a home equity line of credit. A bank issues the money from a home equity loan in a lump sum with a repayment of monthly fixed rate payments. A home equity line of credit is a revolving line of credit with a variable interest rate that you can use and then borrow again once you pay some of the balance off. If you should decide to sell your home while you have the loan, you will need to pay it off prior to your closing.

Personal loans

A personal loan issued through a traditional bank requires a source of collateral, generally a home and an excellent credit score. If you don’t own a home or have a fair or poor credit score, there are various types of other personal loans offered through online lenders where the line of credit loan requirements that are less stringent. They generally require only that you have a steady paycheck, a checking account in your name, and a social security card.

Car loans

It used to be that you could only get a car loan if you had a good credit score. Today, that’s changed. More banks realize that many people have a mark or two against them for reasons that were out of their control. You will pay a higher interest rate than if you had good credit, but if you pay the loan on time for a year or so, you can refinance it through another bank at a much lower interest rate.

Consolidated loans

A consolidated loan is for the purpose of paying off your outstanding debt and then consolidating it into one affordable payment. For many people who own a home, this provides an easy way to free up hundreds of dollars from their budget each month. There are several different types of consolidation loans available, including secured, unsecured, and a student debt consolidation loan. The secured requires the use of collateral, generally a home. Whereas, the unsecured loan bases it on several other factors including your credit score and income and, because there’s no collateral, has a higher interest rate.

Short-term loans

Most times, a short term loan is very easy to acquire. The requirements are much more lenient than that of a traditional bank. A short term loan can range from several months to several years. The downside to acquiring one of these versus a personal loan from a bank is that the interest rates are generally much higher. These type loans offer someone with mediocre to poor credit the chances to pay off debt, cover repairs and other expenses.

Before borrowing any money from a bank or another lender, make sure that you carefully calculate your budget to make sure that you have the money coming in each month to accommodate another bill. If you don’t, then taking on more debt is only going to make your situation worse.

11 thoughts on “Different Loan Options and Their Requirements”

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