Types of Consumer Loans

A consumer loan is very broad term to describe a group of loans that are used for the purchase of consumer goods. Consumer loans are different than a mortgage for example, because mortgages are loans used to purchase homes or real estate.

You can apply for a consumer loan at just about any financial institution. Whether you are approved or not will depend on the type of consumer loan you are applying for and you credit history. If you have a good credit history, you can be approved for more money with a lower interest rate. But if you’re credit history isn’t as good, then you may be required to pay higher interest rates.

Here are some common types of consumer loans:

Auto loan – one of the most common and well-known types of consumer loans is the auto loan. When you go to purchase a new car, many times the dealership or your bank will offer financing. And when car dealerships have sales, they often include low-interest financing to attract buyers. This financing is really a consumer loan that is used to buy a car.

Home equity loan – a home equity loan is a consumer loan based upon the equity you have built in your home. You have to own your own and have made payments in order to obtain a home equity loan. Home equity loans are often used for debt consolidation because they carry a lower interest rate than the credit cards that are paid off using the home equity line of credit money.

Debt Consolidation Loan – as mentioned above, some people use a home equity loan to pay off their debt. But other people may choose another form of consumer loan to pay off high-interest credit cards, called a debt consolidation loan. If you do not own a home and cannot get a home equity line of credit, then a debt consolidation loan may be an option to pay off credit cards.

Signature Loan – if you have a good and long-standing relationship with your bank, you may be able to qualify for a signature loan. This type of loan is a consumer loan that is not backed by any collateral. You will also need to have a good credit rating in order to receive a signature loan. These consumer loans are called signature loans, because the bank agrees to make you loan based on your signature and a promise to pay the loan back.

Consumer loans can also fit into two broad categories – unsecured and secured.

Unsecured Loan

An unsecured loan means that the bank is willing to loan you money without any collateral – similar to a signature loan. Typically you will need to have a good credit rating showing that you have paid back past debts on time and that you continue to make payments on time for current debts. Many times unsecured loans come with higher interest rates because there is more risk for banks.

Secured Loan

The other category of consumer loan is a secured loan. This type of loan is backed with collateral. An auto loan is a type of secured consumer loan. Because you are purchasing a car, the bank uses the car as collateral. If for some reason you default on the loan, or don’t make your payments, the bank can take back the collateral – in this case, the car. Since the bank has collateral, interest rates are more likely to be lower than on an unsecured loan.