Reviews, evaluations and opinions of our experts on the products and services that appear on this page are totally objective and independent. Some products may be from our partners who compensate us, which may influence where and how they are displayed. Advertising disclosure.
They say that necessity obliges, and many times we have to appeal to some type of loan to solve a situation or carry out a project. When there is a financial system that works, you know that you have financing options for different needs.
As credit abounds in the United States, we will review the most common alternatives to get extra money.
If you want to know how a loan works in the USA, consider that this action simply implies receiving an amount of capital with an interest rate and a term to pay. There are for different purposes, with conditions that vary depending on the lender and them may be secured or unsecured.
Knowing the types of loans is important, both for your personal finances and for your financial goals. For now, we will leave the “standard” classification and concentrate on a more general one:
Secured and unsecured financing
When we talk about a secured loan, we refer to an assumed debt that is backed by an asset (a house or a car, for example) or by a deposit of money.
If you cannot finish paying for any reason, the lender uses that guarantee to cover its losses. These loans may require a collateral valuation, they finance you the equivalent of said valuation and the interest rates are usually lower. An example of this secured loans are the mortgages.
On the other hand, it is not difficult to assume that an unsecured loan is the opposite. Since there is no collateral, you depend on the income you currently generate and your credit history to guarantee it.
This personal loans tend to be more difficult to obtain and have higher interest rates if you don't have a high credit score. When you default, the bank appeals to lawsuits or charging strategies.
Open-ended and closed-ended loans
Within this particular classification, we can define each one as follows:
- Open-ended loans. They are known as revolving credits that you can use over and over again. Frequent examples are lines of credit or credit cards, which have an established limit. You have the option to spend part or all at once. Every time you use a certain amount, the credit decreases. Every time you add to the balance, you have more money to use.
- Close-ended loans. These loans are designed for a specific goal, so you do not have money that you repay and you can use again. Since they have a fixed term, you must cancel the debt to meet the terms. As you pay the monthly payments, the outstanding balance decreases. This is how mortgages, car loans and personal loans work.
In the United States, the term "conventional" is associated with mortgages that are not backed by the federal government. That is, they are those offered by banks or credit unions and not those of the FHA, RHS, VA or any other agency.
These loans may or may not be conforming, meaning they are regulated by Fannie Mae and Freddie Mac or do not meet their criteria.
Types of common loans in the USA
Based on the above, we can draw another more specific classification, which we will summarize in 5 basic sections:
- Quick loans and cash advances. They are short-lived, offered by credit card companies or other businesses, and are easy to obtain. These payday loans cannot be deducted on the tax return, you get small amounts for minor expenses or emergencies, and they have high costs due to their interest rates linked to short terms.
- Business Credits. Ideal for entrepreneurs, they require the approval of a business plan and are offered by local banks. They are secured loans, the amounts granted vary from thousands to even a million dollars and can give you up to 25 years to pay. The interest rate varies and can be negotiated.
- Home Equity Line of Credit (HELOC). It works like a revolving credit, just like a credit card. You're asking for money based on the value of your home, so you get a set limit. You have 10 to 20 years to use the financed amount, and it may be tax-deductible.
- Home Equity Loan. Home Equity Loans are financing supported by the value of your home with respect to the market. The terms are much like a mortgage, with 15 to 20 years to pay, relatively low rates, and tax deductibility. They are usually used for remodeling, consolidating debts and other major expenses.
- Mortgages. They are loans designed to finance the purchase of a home, in which the value of the house is also used as collateral. There are many types of mortgages, such as fixed, variable, jumbo loans, those guaranteed by federal institutions, etc.
- Personal loans. Also called consumer loans, can be secured or not and used for any purpose. Amounts ceded can range from a few hundred to a few thousand dollars, usually require fixed income or verification of other assets. They have higher fees than mortgages, but less than payday loans, and are approved in a few days.
There are many types of loans available that you can find in the Busconómico search engine/comparator. Here you have accurate and up-to-date information on all banking products in the US.
Español: Tipos de préstamos en Estados Unidos