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Types of Credit


Types of Loans Loans can be secured (backed by collateral) or unsecured (not backed by collateral).

 

Mortgage:

A loan to buy a home, using the home as collateral. You make a down payment, and the lender covers the rest. Mortgage terms are often up to 5 years, with an ammortization of between 25 to 30 years. If you fail to make payments, the lender can foreclose on the home.

 

Auto Loan:

Similar to a mortgage, but for a vehicle. If you default, the lender can repossess the car.

 

Debt Consolidation Loan:

Combines multiple debts into one payment. The bank pays off your other debts, and you make one payment to the consolidation lender.

 

Home Improvement Loan:

Funds repairs or improvements to a home. These loans may be secured (for large amounts) or unsecured.

 

Student Loan:

These loans are typically provided by the government or private lenders to fund education. Repayment usually starts six months after graduation.


Business Loan:

Known as a commercial loan, this is credit provided to businesses for capital expenses like equipment, inventory, or staff.


Lines of Credit:

Lines of credit offer a flexible way to borrow. Similar to a credit card, a line of credit provides a limit that you can borrow from as needed. You repay it over time, and as you pay it down, you can borrow again up to the limit.


Types of Lines of Credit


There are three common types of credit lines:

 

Personal Line of Credit:

Usually unsecured and requires a high credit score. These lines have lower limits and higher interest rates.

 

Business Line of Credit:

Used by businesses. The lender evaluates the company's financial health to determine creditworthiness. Business lines may be secured or unsecured.

 

Home Equity Line of Credit (HELOC):

Based on your home’s value and secured by the home itself. You can borrow up to a certain amount over a period (typically ten years) and repay it over an extended period after the draw period ends.


Credit Cards:

Credit cards are the most common type of revolving credit. The average American had 3.84 credit cards in 2020, and as of 2021, the total credit card debt in the U.S. reached $841 billion, with an average debt of $5,221 per person and an interest rate of about 16.4%.

 

If you carry a balance and only make the minimum payment (usually 3% of the balance), it can take years to pay off. For example, paying only the minimum each month on a $5,000 balance at 16.4% interest could cost over $1,500 in interest and take 39 months to pay off.

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