Different Types of Credit
December 18, 2020 - Jacob Silva
Different Types of Credit
You might not know this, but credit takes a big part in consumer culture. Despite this, many individuals don't know what they are getting into when they take out a loan or open a credit card. No need to look any further! Here we are going to lay out the most popular types of credit available to the average individual.
Credit Cards
Many credit cards are known as revolving credit, meaning that it can be continuously used until the credit limit is reached. This is different from a loan, where a loan is a fixed amount and is usually paid in installments or monthly payments. Credit cards also have different perks and downsides. For example, they can be used for everyday purchases and often offer points for different types of purchases, but interest is accrued on unpaid balances,
Personal Loans
There are two different types of personal loans: secured and unsecured! A secured loan is one that has collateral attached to it, in case the borrower cannot make payments. In the event that the borrower stops paying, the lender can take the collateral. Think of it like this, I need $1,000 and I have $1,000 in my savings account, but instead of using the $1,000 in my savings account I take out a secured loan and use the $1,000 in my savings account as collateral. The other type of personal loan is an unsecured loan, these loans DO NOT have collateral. The lender trusts that the borrower will pay back the money. Secured loans usually offer lower interest rates than unsecured loans. Personal loans can be used for anything.
Auto Loans
Like the title states these loans are usually used for a vehicle and are categorized as a secured loan because the car is collateral. If the borrower cannot make the payment, the lender can take the car. They are financed through regular monthly payments that can take anywhere from 36 to 84 months to pay off.
Student Loans
These loans are used to pay for one's education by financing the unmet financial needs of a person that are not covered by savings, scholarships, or grants and are categorized as an unsecured loan. There are many types of student loans: federal and private loans, and inside those are two different types: subsidized (no interest while in school) and unsubsidized (accrues interest while in school). When individuals start to pay back these loans they are usually in monthly payments.
Mortgages
Talk about adulting! These loans are associated with buying a house and are categorized as secured loans with the house serving as collateral. Usually individuals pay monthly payments anywhere from 15 to 30 years! They tend to have really low interest rates, roughly about 3.00% to 8.00%, depending on market conditions.
Payday Loans and Cash Advances
A payday loan is usually required when someone needs fast cash before they get paid. They usually range anywhere from $100-$1,000. These loans are typically paid by the next pay day due to their EXTREMELY high interest rates. Cash Advances are when you take out cash from your credit card, this type of action is usually capped at a few hundred dollars, is counted towards your credit limit, and has a higher interest rate than if you were just to use your credit card.
And there you have it, folks--the most common types of credit available to you. If you have any further questions about a specific type of credit you want to acquire or want more information, feel free to schedule a consultation with us or email us at cfc@unm.edu!
