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Credit Check: The Guide to Different Types of Loans and Your Credit Score

Planning to go to college soon? How about buying a car, launching a business, or your first home?

Regardless of your plans, it’s more than likely you’ll need to take out a loan.

There are different types of loans are commonplace in the U.S. society. In fact, America runs on debt. A huge majority of the population are in debt.

This is not a bad thing per se but it has the potential to be a life wrecker if you don’t manage it right. For that, you must gain financial literacy.

With that goal in mind, dive in below and learn about the different types of loans and about your credit score today:

Types of Loans

loans folder

Mortgage loans, personal loans, and such all fall into one or more categories below. Let’s take a look at what these are to find out exactly what you need.

Secured and Unsecured Loans

Secured loans are those that ask for a collateral, which goes to the lender should you default on the loan. Unsecured loans, therefore, are those that don’t require a collateral.

If you have a property you can use as a collateral, secured loans are almost always the better choice. You can offer your house, your car, or even your savings account. Because lenders have more security, they tend to offer lower interest rates.

The interest rate and the loan value also depend on the value of your collateral. The lender will first assess its value and then decide how much they are willing to risk on you. It goes without saying that the higher the value of your property, the bigger the loan you can get.

The risks increase for lenders if there’s no collateral, which is why unsecured loans have higher interest rates. We also call them personal or signature loans. In this type of loan, your income and credit history will matter the most.

Still, this can be a good option for you, especially if you have a good credit score. This, coupled with a good income, can lower the interest rates.

Open-Ended and Closed-Ended Loans

Another pair of loan classifications is the open-ended and closed-ended loans. What differentiates the two is the line of credit.

An open-ended loan has a line of credit with a fixed limit. The borrower can take out money as he wills up to the limit, repay the borrowed amount, and then borrow money again. If that sounds familiar, that’s because this is how a credit card operates.

Another example of this type of loan is a home equity line of credit. The limit will depend on the value of the house minus the mortgage owed. This is a great option for homeowners looking to renovate their homes.

A closed-ended loan doesn’t have a line of credit. Once the borrower takes out the loan, it won’t become available again. When they make a payment, the balance decreases.

Examples of this type of loan are mortgages, auto loans, and student loans. If you find that you need more money than the full amount of the loan, you’ll have to apply for another one.

Conforming and Non-Conforming Loans

There are guidelines set by Fannie Mae and Freddie Mac corporations that mortgage loans either follow or not. The guidelines include provisions for the loan limit, which will depend on the borrower’s income, employment history, network, loan-to-value ratio, debt-to-income ratio and more. Those that follow these guidelines are conforming loans, while those that don’t are non-conforming loans.

It’s usually easier to qualify for conforming loans. It might also have lower interest rates and lower down payment. If you want something higher than the conforming loan limit, though, non-conforming loans might be more suitable for you.

An example is a jumbo loan, which has a larger loan amount. The rates are usually higher, though, because of the increased risk for the lender. The qualification criteria are also stricter, and the down payment is about 20% or more.

Your Credit Score

Now that you know the different types of loans, let’s move on to your credit score. It’s an important consideration when you’re applying for loans as it can dictate whether you’re worth loaning to or not. It’s also the basis of how much interest rates you’re going to get.

How to Know Your Credit Score?

Once a year, you can receive a free credit report from each of the 3 major credit bureaus: Experian, Equifax, and TransUnion. You may also purchase it from these corporations or from other companies.

Some banks and financial companies are also now providing easy access to the credit score of their customers. It can be on the financial statement or on the online account.

What Type of Credit Score Lenders Use?

There are 2 types of credit score: FICO Score and VantageScore. Whether you have a good or bad credit depends on your score on which model.

FICO Score:

  • 300 – 579: Very Poor
  • 580 – 669: Fair
  • 670 – 739: Good
  • 740 – 799: Very Good
  • 800 – 850: Exceptional

VantageScore:

  • 300 – 549: Very Poor
  • 550 – 649: Poor
  • 650 – 699: Fair
  • 700 – 749: Good
  • 750 – 850: Excellent

Apart from these, there are also industry-specific scores, but that’s for another time.

Loans for Your Credit Score

If you have excellent credit, companies will most likely approve your application. Not only that, you’ll likely have excellent loan terms, as well.

Individuals with poor or very poor credit scores will have a hard time getting approved for a loan, but it’s still possible to borrow money with bad credit. There are loans for bad credit that take the risk of lending a loan to people with poor scores. Some loans also have no credit check.

The caveat is that the interest rates are astronomical. Still, the option is there when you need it.

Most Important Thing in Loans and Credit Scores

Knowing the types of loans is important. However, there’s something even more important than that: paying back.

Pay back what you owe and only borrow money when you have the means to repay it. This is also good for your credit report, as making payments on time will increase your credit score.

If you need more financial advice, visit our blog today! Check out this guide, for example, to learn how to save on clothes shopping.

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