There are many types of loans, such as student loans, vehicle loans, and business loans. Consumer protections may vary by loan type. We provide more information below on common loans and tips to consider when borrowing money for certain purposes.
Business loans are not subject to most federal consumer protection laws and regulations.
- Types of Loans
- The Cost of Borrowing
- Vehicle Loans
- Consumer Protections Available
- Additional Resources
Types of Loans
There are two main categories of loans: installment loans and revolving loans.
An installment loan is usually repaid in equal payments, or installments, for a specific period of time, usually several years. Examples include most:
- Fixed rate mortgages (home loans)
- Auto loans
- Student loans
A revolving loan (or revolving line of credit) allows you to make unlimited purchases up to a pre-approved dollar limit. Your payments will vary based on how much you have borrowed. Examples include most:
- Credit cards
- Home equity lines of credit (also called a HELOC)
Installment and revolving loans can be secured or unsecured.
With a secured loan, you pledge collateral to secure repayment of the loan. Collateral is an asset you own, such as your house, vehicle or cash. If you cannot repay the loan as agreed, the lender can take your collateral and use it to get some or all of their money back.
- You may be responsible for paying the remaining balance on the loan if the collateral does not sell for enough money to repay the debt.
- Mortgages and auto loans are usually secured loans.
Unsecured loans are made based only on your promise to repay the money you borrow. They are not secured by collateral. Lenders consider these loans more risky than secured loans, so they may charge a higher interest rate than for a secured loan.
- Credit cards and student loans are often unsecured loans.
The Cost of Borrowing
It is important to know about the costs associated with borrowing money.
You will generally repay more money than you borrowed. Credit cards are generally an exception. If you do not carry a balance and pay the current charges in full by the due date, you will not be repaying more money than you borrowed.
In addition to repaying the money you borrowed (called the Principal), you generally have to pay two costs: interest and fees.
Interest is the amount of money a financial institution charges for allowing you to use its money. It is expressed as a percentage and can be either fixed or variable.
- Fixed rates stay the same during the term of the loan, except with most credit cards, where the rate can change if the bank gives you required notice.
- Variable or adjustable rates might change during the term of the loan. The loan agreement explains how the rate can change.
Fees may be charged by lenders for certain activities, such as reviewing your loan application and servicing the account.
- Common examples of fees include origination fees for home mortgages or late fees if you do not make credit card or other loan payments on time.
- Lenders often subtract fees from the loan proceeds before you receive the loan money. For example, if you borrow $1,000 and there is a $100 fee, you may only receive $900.
Prepayment is the early repayment of all or part of a loan. When you prepay, you pay the lender more than the amount of your regular monthly payment. You have them apply the “extra” amount to your outstanding balance.
- If you prepay your loan in full, you will stop paying interest because you no longer owe any money.
- If you prepay part of your loan: You could reduce interest costs
- You may finish paying off your loan earlier
Prepayment is one strategy for reducing the costs of borrowing money.
Some loans have prepayment penalties, and others do not.
- A prepayment penalty charges a fee for early repayment of all or part of a loan. The specifics vary from loan to loan.
- When you shop around for a loan, find out whether loan offers have prepayment penalties.
For most consumers, an auto loan is their biggest monthly expense after their mortgage or rent payment. That's why, when you're thinking about buying a car, it's important to thoroughly research loan options. Here are some strategies to consider:
- Determine how much extra money you have every month to use for a car payment. A good budget also includes costs like insurance, taxes, gas, and routine maintenance.
- Shop around to different banks, credit unions, car dealers, or other lenders offering low interest rates or cash rebates.
- Call several car dealers to see if you can negotiate a lower price for the car.
- Before you sign a contract to finance a car, read the contract to make sure you understand the financing terms. Be sure to keep a copy of the contract signed by both you and the lender.
Consumer Protections Available
Certain types of loans are covered by consumer protection laws and regulations but others are not. For example, commercial and agricultural loan transactions are not subject to most federal consumer protection laws and regulations. Generally, consumer protection laws cover loans established primarily for personal, family, or household purposes. Some common consumer protections include:
- Lenders must show you the cost of credit as a dollar amount and an annual percentage rate (APR) and disclose terms in a meaningful and uniform manner.
- Debt collectors may not use abusive, unfair, or deceptive practices to collect money from you.
- Your lender, servicer, or debt collector must provide accurate information to credit reporting agencies. Credit reporting agencies must also report accurate information you. Once a year, you may request a free copy of your credit report from each agency by telephone, mail, or at https://consumer.ftc.gov/credit-loans-debt.
- Your lender may not discriminate in any aspect of a credit transaction based on race, color, religion, national origin, sex, marital status, age, if in good faith, you receive public assistance, or if you exercise your rights under the Consumer Credit Protection Act.
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