What’s the difference between different types of loans?

There are many different types of loans available these days and it’s easy to get lost between all the options in deciding which one is the best for your specific purpose and situation. We have looked at some of the most common types of loans to help your understanding of them.

Personal Loans

As implied by the name, a personal loan is money that you borrow for personal use or general expenses. This means it can be used for things like holidays, making improvements to your home, consolidating debts, education or even to finance a part of your business.  The amount of money you can borrow will differ from bank to bank, as will the repayment period. Your credit record, financial capacity and the perceived risk will also have an impact on the amount of money you will be allowed to borrow using a personal loan.

Usually, the repayment period for an unsecured personal loan could stretch from 12 to 48 months. Secured personal loans (where an asset like a house serves as collateral), however, could have repayment periods ranging from 36 to 72 months – or even longer. Generally, if you opt for a secured personal loan, you will also be able to get lower interest rates than you would with an unsecured personal loan.

Student Loans

Student loans differ from other loans in that they do not have to start being paid off from the first month in which the money gets borrowed. Instead, student loans - which are taken out to help tertiary education students to finance their studies and cover living expenses - only need to be paid back from once the student finishes their education. In many cases, the loan is taken out by the student with their parents acting as surety. Interest on the loan usually gets paid from when the loan is taken out, however, but the rates on student loans are typically lower than that of car loans or credit card debt, for instance.

Every bank has its own terms when it comes to student loans. Generally, interest rates will be variable so it’s a good idea to find out what the maximum interest rate would be for your loan so that you can make sure you’re financially capable of covering it. It’s also a good idea to find out what you’re starting salary would look like to make sure that you would be able to pay off the loan once you start working. There are many young professionals who struggle to make ends meet because of their student loans, and you wouldn’t want to be one of them.

Home Loans

Home loans are, as you would assume from the name, used when you would like to buy property like a house or an apartment. These loans make it possible for many people to afford property which they otherwise wouldn’t be able to purchase. Home loans are also known as mortgages and comprise of two different categories, which differ in terms of the interest to be paid. Basically, you can opt for a home loan with a fixed interest rate or one with an adjustable rate.

With a fixed interest rate home loan, the amount of interest to be paid is set at a certain amount which stays the same throughout the 15 or 30 year term that the loan gets paid off in. Many opt for this loan as you can easily budget and plan for the fixed amount to be paid and it gives peace of mind as a ‘safer’ option. This is usually the option that home buyers go for if they are planning on staying in the home for numerous years as opposed to a shorter term.

With an adjustable rate home loan, the interest rate on the loan will fluctuate throughout the period it gets paid off. There is usually an initial period of time for which the interest rate will stay the same, after which the interest rate will fluctuate at set intervals and in accordance with a specific interest rate index. This means that it could decrease and save you some money or increase and potentially mean that you can no longer afford the down payments. People usually opt for this type of home loan because the initial payment seems affordable and makes owning a home more accessible, but it is important to remember that the payment could increase substantially.

Vehicle finance/Car Loans

Loans to finance a vehicle purchase can come from a bank or the car dealership you purchase the car from. It is usually a better idea to get the loan from a bank as car dealership loans end up costing more. Car loans usually stretch over a period of five years and consist of the outstanding balance of the loan as well as the interest you have to pay for borrowing the money.

As with any other type of loan, qualifying will depend on your credit record and general financial suitability. Some institutions will ask you for an initial down payment, which will decrease the outstanding balance and, therefore, the interest rate you have to pay. Just as a house serves as security for a home loan, a car will act as security for the car loan and can be repossessed if payments are not made.