Are you an entrepreneur or small business owner with limited capital? Here are the top five types of loans you should know about...
What Are The Different Types Of Loans That Can Help Entrepreneurs?
There are different types of loans out there with each one serving a specific purpose. However, as someone who may have limited knowledge about finance, you might have a hard time distinguishing which one is for what. You’re not to blame. The world of finance is filled with all kinds of jargon and fancy marketing buzzwords that will confuse you to no end.
This article is meant to provide you a details on the different types of loans. We won’t cover all of them here, but we will outline the most important types that entrepreneurs should absolutely be aware of.
Let’s go ahead and take a look, shall we?
The Top Five Types Of Loans You Should Know About
1. Student Loans
Students loans are for students who need some assistance in covering their college education. The cost of higher education is no joke. While inn the U.S. the total student debt amounts to $1.4 trillion, education always pays for itself. Entrepreneurs and small business owners need to invest in themselves.
There are two types of student loans:
- Federal student loans
- Private student loans
Student loans funded federally offer better interest rates and their repayment terms are easier to meet. Also, those who apply for federal student loans don’t need to undergo a credit check. Most financial advisors will advise that you exhaust all venues for applying for a federal loan first before opting for private student loans.
2. Mortgage
If you’d like to buy a home without paying for the full amount upfront, a mortgage loan is what you need. The most important factor lenders look into when it comes to this loan is the debt-to-income ratio.
Is your income able to cover your existing debt plus the mortgage? If yes, there’s a great chance that you’ll get approved for a mortgage.
Your income will greatly affect the choices of homes you can afford. Some factors to look into when computing how much you can afford are the following:
- Your income
- Minimum monthly debt payments
- Money available for down payment
- Credit score
The more you are able to offer as a down payment, the better because it means you need to borrow a smaller amount. Small loans translate to shorter payment terms and lower interest rates.
3. Auto Loan
An auto loan is one of the most popular types of loans.
Did you know that 85% of new car purchases are made through a loan? So if you want to borrow money to afford a car, don’t be embarrassed. Most people have an auto loan. Just be sure you are paying on time.
You have two options for financing:
- Through the dealership
- From direct lenders like banks and credit unions
To make the best decision, you want to look at the total cost (including tax, title, fees, and interest) and the term of payment. The longer the term is, the more you pay on interest rates. Time is money after all.
For the time that you are paying the car loan, the dealership or lender holds the title which gives them the right to repossess the car should you miss your payments. Only when the loan is paid in full will you be able to get the title of the car.
Entrepreneurs and small business owners should consider options and advantages of purchasing or leasing the automobile through their company.
4. Personal Loan
Personal loans can be used for multiple reasons:
- Paying for a medical emergency
- Purchasing an expensive needed item
- Helping a family member
- Going on a luxurious vacation
Some people mismanage personal loans for the simple reason that the spending is up to their discretion. Try not to do that.
To apply for a personal loan, lenders will do a background and credit check. No collateral is required, meaning if you default on your payment, the lender has nothing to seize. Of course, this is the last thing you want to happen since whatever debt you miss paying will reflect on your credit score, thus affecting your ability to apply for other types of loans in the future.
So if you decide to get a personal loan, make sure you are using the money wisely and paying it back on time.
5. Small Business Loans
For entrepreneurs hoping to open or expand their business, there are small business loans.
It can be hard to pursue that life-long dream of starting a business when you have no capital. That’s why this type of loan exists.
Many business owners will apply for a loan to cover a partial amount of their new venture while the rest is paid for using their savings. This line of credit allows the business to cover the cost of capital or meet day-to-day expenses.
Business owners do not need a collateral as long as the bank or institution financing them finds the business to be creditworthy. The purpose of a business is to make a profit so when applying for this loan, you need to show the lender proof that your business idea is one that will generate income. So, be prepared to submit a business plan.
Did we miss any other important forms of lending? Share them in the comments below!
