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How to Take out a Loan: 6 Common Loan Types

Grace Pinegar
Grace Pinegar  |  September 3, 2019

Whether we’re buying a car, planning a wedding, or trying to go to college, one fact rings true: life is expensive. So expensive, that we don’t always have the money to pay for it up-front. That’s where loans come in.

A loan is when a bank or other lending institution gives you a sum of money on the legally-binding promise that you’ll pay them back. Loans almost always come with interest.

Tip: Read an explanation on the times interest earned ratio

Interest is an additional percentage that you pay the lending institution for the service of borrowing their money, and it’s how loans stay profitable.

Say (completely hypothetically) someone has around $20,000 in student loan debt from the University of Missouri (again, this is not me), and they pay around $300 per month on these loans.

Some of that monthly payment is attributed to the loans themselves, while the rest goes toward interest. In short, while paying off a debt, you accrue more debt due to interest.

For that reason, you should be informed of your loan options and loan details before you even walk into a bank. Lending institutions can, unfortunately, prey on the vulnerable, which is why I’m here to explain the process to you beforehand.

How to take out a loan

Did you know there are different types of loans? The type of loan you need will directly influence the paperwork you fill out, your repayment plan, and the repercussions of missed payments.

6 common loan types

Let’s go over the types of loans from which you can choose, as well as how to apply for or “take out” each.

Did you know that, as a public servant, you might qualify for public service loan forgiveness? Check out the list below to ensure your ducks are in a row.

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Personal loans

Let's talk about personal loans!

Personal loans are for individuals who would like help paying off an item/items of relatively low value. Low when compared to, say, a home. You might get a personal loan if you wish to pay for a nice new gadget, or in the case of those living in the US, pay off a hospital bill.

How to get a personal loan

Those wanting to apply for a personal loan should first assess their credit to determine if they qualify. If your credit score is lacking, you may want to take some steps to build it up before you seek out a personal loan.

Once you know your credit score, you can check a loan calculator to pre-determine what you might qualify for. Pick out a lender and see if they’ll pre-qualify you for a loan. This helps you determine which lenders are likely to say yes before you go through with the entire loan application process.

personal loan offer example

Image courtesy of LendingTree

Once you’ve pre-qualified for a personal loan with a few different lenders, compare the offers they’ve given you. Be sure to research the loan options at your local credit unions and banks as well, as their offers might be even more attractive.

Before choosing a lender/loan, make sure all the details are to your liking. Questions to ask yourself are: does this lender require automatic withdrawals? How flexible are their payment options? Are there any penalties for paying off a loan early?

Once you’ve approved all the fine print, it’s time to continue with the application process. You’ll typically have to provide identification, proof of address, and proof of income. The lender will check your credit score, and you should have your funds within a week after that.

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Credit card loans

Let's talk about credit card loans!

Credit card loans, which is just the act of owning a credit card in your name, are for anyone who wishes to open a line of credit. People often do this to improve their credit scores, reap the rewards a certain credit card offers, or as a riskier strategy to pay for expensive purchases they don’t have all the money for at that time.

How to get a credit card loan

You get a credit card loan simply by applying for a credit card and getting approved. You can apply at banks, online, over the mail, and at stores that offer their own credit card, to name a few places.

In order to get approved for a credit card, you need to have a good credit score. This seems counterintuitive since you may be applying for a credit card in order to improve your credit score. Hopefully, you’ve been able to build up credit in other ways, such as through paying bills and loans on time.

If you’re rejected, you have a couple of options. You can call the card issuer and ask for them to reconsider your application. If they say no, your other option is to wait six months and apply again after you’ve taken steps to increase your credit score.

Home loans

Let's talk about home loans!

Home loans are for people who are ready to purchase a home. This type of loan is commonly referred to as a mortgage. Mortgages are long-term loans of great value.

How to apply for a home loan

In order to apply for a home loan, you have to really have your ducks in a row. A good place to start is with a mortgage calculator. This will help you take the beginning steps to determine the price range of homes you can afford.

Among other details, anyone hoping for a loan this big will need to inform their bank of their:

  • Credit score, credit report, and credit accounts
  • Available cash for a down payment
  • Household income
  • Available funds for closing costs
  • Home price ranges

Much like other loans, prospective homeowners can get pre-approved with lenders, which gives them the opportunity to shop around for the best loan offer. The standard mortgage is a 30-year loan with a fixed rate.

home loan offers

Image courtesy of RefiGuide

Once you’ve been pre-approved, you get to pick the lender of your choice and continue with the application process through them.

The thing with mortgages is that many institutions simply won’t lend to you if you don’t have a sizable down payment and money for the closing costs. It is nearly impossible to purchase a home completely through borrowed money.

If you get denied at first, set up a savings plan and try again once you have enough money to pay for at least 20 percent of the home out of pocket.

Small business loans

Let's talk about small business loans.

Small business loans are, unsurprisingly, for anyone who is trying to begin a small business. They are either awarded by the Small Business Administration (SBA) or a local bank.

How to apply for a small business loan

Banks and lenders only want to grant loans to people they know will pay them back. For this reason, it is rather difficult to get a small business loan, especially if you or your business has no history of success.

In order to get a small business loan, you’ll have to ensure you have good credit. If you don’t, you should spend time working to improve your credit. You should also research local lenders. As a small business, you may have better luck seeking approval at a smaller, local bank.

Before seeking out a small business loan, make sure you have written up a business plan. (See: Elements of a Business Plan) Lenders will want to see this to help decide if you’re worth their investment. It is also wise to make a presentation of your business plan so you can physically show lenders how well-thought-out your plans are.

Once you’re ready, make an appointment with a loan officer to whom you can make your case. Be sure to include an executive summary with your business plan so they can skim over your work to better understand what you’re wanting to do.

From here, it’s really up to you to make the best argument for your business, and the loan officer to believe in you.

Related: Learn more about UCC filings and how they affect your business.

Auto loan

Let's talk about auto loans.

Auto loans are for any person looking to purchase a motor vehicle.

How to apply for an auto loan

In most instances, you get an auto loan approved through your bank or bank of choice. As with all other loans, the first step is to check your credit score to make sure you’re up to snuff.

Following that, you should look to get pre-approved for auto loans from online lenders. This will help you figure out what a bank would be willing to give you. After you’ve been pre-approved, determine a monthly payment that should be less than ten percent of what you take home each month.

auto loan offers

Image courtesy of Next Gen Personal Finance

Next, you should go car shopping and compare dealership offers with what the bank can give you.

Student loan

Let's talk about student loans.

Student loans are reserved for anyone seeking education from an accredited institution after high school.

How to apply for a student loan

Typically, students go through FAFSA.ed.gov in order to apply for student loans. FAFSA will loan students a sum of money based on their need.

If the federal government does not award you enough student aid to make school affordable, you can try and go through a private lender. Check out some of the best private student loan lenders.

You will likely need someone to co-sign on these loans, as anyone entering into undergrad probably does not have a lot of credit built-up. It is worth saying that student loans are a huge scam industry, and there are a lot of fake loan sites out there eager to steal your personal information.

For this reason, it’s best to either go through the federal government, or a trusted lending institution.

Thanks for lending me your ear

Debt is scary, but the truth is, it’s a necessity in the society we’ve invented. You need to be able to go places, but few people have all the cash for a car sitting in their savings account.

With any type of loan, be smart about it. Talk to friends or family about their experiences borrowing money and see if they have any suggestions. Don’t take out loans unless you have to, but stay informed if you do.

Do you work as a public servant? Figure out how to public service loan forgiveness works. 

Grace Pinegar
Author

Grace Pinegar

Grace Pinegar is a lifelong storyteller with an extensive background in various forms such as acting, journalism, improv, research, and now content marketing. She was raised in Texas, educated in Missouri, and has come to tolerate, if not enjoy, the opposition of Chicago's seasons. (she/her/hers)