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Types of Loans

Loans are divided into different types. Each serves a specific and distinct purpose. In general, loans differ in terms of “lifespan,” interest rate calculation, and schedule of payments. This article will discuss each of these loan types.

Student Loans

These loans are available for college students. Basically, a student loan is designed to help the student and his/her family with regard to the costs of higher education. This loan is further divided into two subtypes:

Federal Loans: These loans are subsidized by the government. Thus, they involve lower interest rates and better payment terms.

Private Loans: These loans are funded by privately held financial institutions. Here, the interest increases while the college student is still studying. 

The borrower will be required to pay the loan after graduation. Often, the terms and interest rates of the loan are determined by the lender.

It is important to know that all student loans are exempt from cancellation in case of personal bankruptcy. That means that the borrower will be required to settle this liability regardless of his/her financial status.


These are loans that are financed by banks. Mortgages are designed to help people who want to buy a house but can’t pay for it upfront. This type of loan often involves low-interest rates. However, it is “attached” to your property. That means your ownership rights over that property will be forfeited if you fail to make payments.


Auto Loans

Auto loans are offered to people who want to purchase a vehicle but do not have enough money to pay for it in cash. Similar to mortgages, auto loans are tied to the property bought by the borrower. Auto loans may be financed by a bank or by the car dealership itself.


Personal Loans

Personal loans do not need a specific purpose. You can use the funds for anything you can imagine. This is considered as an attractive choice for individuals with current debts (e.g. credit card debts) who want to reduce interest payments by transferring cash balances. In general, the terms set for a personal loan depend on the borrower’s credit history.


Loans for Veterans

The DVA (Department of Veterans Affairs) offers lending programs to veterans. Loans that are backed by the DVA don’t involve money from the government. Rather, the DVA serves as a co-signer and proves your capacity to pay. That means you can avail of high loan amounts and low-interest rates.


Small Business Loans

A small business loan is granted to entrepreneurs who want to start or grow a business. The U.S. SBA (Small Business Administration) offers a wide variety of loan options depending on the borrower’s financial needs. As of now, the SBA is the best option when it comes to small business loans.

Payday Loans

Payday loans or installment loans are characterized by quick payments and high interest. A payday loan is intended to bridge the gaps between paychecks. As of now, this type of loan is being used by people who need to live “paycheck to paycheck.” The U.S. government discourages its citizens from availing of payday loans because of the high-interest rates involved.


Consolidated Loans

This type of loan is designed to simplify the borrower’s finances. Basically, a consolidated loan pays some or all of the borrower’s outstanding loans. Instead of dealing with several financial institutions, you can get a consolidated loan and transact with a single company. This kind of loan offers two advantages: (1) lesser monthly payments, and (2) lower interest rates.


Cash Advances

Cash advances are short-term loans processed using the borrower’s credit card. Instead of utilizing the credit card in making payments, the individual will take it to the bank or an ATM to receive some cash. This money can be used for personal purposes. Currently, cash advances can also be made by writing a check to money lenders who offer such services.


Home Equity Loan

If the value of your home is more than your liabilities related to it, then you have equity in that property. You can use that equity to help finance certain projects (e.g. house renovation, paying student loans, credit card debt consolidation, etc.).

In using this kind of loan, the borrower’s home is used as collateral. This kind of collateral proves the borrower’s capacity to pay off the loan. As a result, the terms and interest rates are better than other types of loans.



Loans are used to finance needs and wants. If you need to do or want something but you don’t have enough money for it, there are loan options available for you. 

Generally speaking, you can use the money from loans to pay bills or purchase luxury items. However, you should fully understand the terms set for the kind of loan you will be availing of. You should know the kind of loan you are getting and whether it is linked to your properties.

You also need to know the repayment policies for your loan: how much your monthly payments are, how much time you have in repaying the loan, and the consequences of missed payments. If you are confused about the loan terms, don’t hesitate to ask for explanations or modifications from Bluesky Financial experts.


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