What are the major types of loans in the US?
- Secured loans. Why should a bank provide any individual or entity with money and risk with its own assets? In the case of a secured loan, everything is clear. A borrower uses their property like a house (home equity loan) or a car as collateral to ensure the payment capacity. The risk for such a loan agreement is losing assets in case of non-repayment of debts. However, such loans are considered reliable, and therefore lenders are willing to provide their clients with higher amounts of money.
- Unsecured loans. The other question is, what can encourage lenders to trust borrowers who cannot reassure their solvency with some estate, bonds, or other assets? A person who cannot use something as collateral can take out an unsecured loan. Such loans are riskier for lenders as any assets do not back them, and that is why their interest rates are higher and the loan amount is less. Usually, it does not exceed $5000.
- Joint loans. The other peculiarity of lending is the availability of joint loans. Thanks to such an instrument, a person can share monthly payments with another borrower. Joint loans are usually borrowed by business partners, couples, or close friends. Taking out joint loans can be easier than originating a personal loan, as in this case, both applicants have equal responsibilities for the loan. Moreover, joint loans provide the co-signer with better options and could strengthen their credit history.
- Personal loans. Personal loans typically are borrowed for day-to-day reasons like paying medical bills or buying household appliances. Depending on the loan payment terms, the loan payment period may differ from 2 up to 5 years.
- Payday loans. Payday loans are not considered the best option, as their interest rates can be up to 400%. Moreover, in case of not paying the debt on time, lenders can take money directly from the borrower's bank account.
- Home equity loan. The real asset itself secures a home equity loan. Usually, the borrower repays the loan by making equal monthly payments for a certain period. If the borrower can't afford the debt repayment, it's possible to lose the home in foreclosure. That is why many lenders prefer originating loans for an amount that does not exceed 80 percent of the mortgage amortization on the house. Many dishonest lenders are trying to betray their customers by hiding important loan details. It is important to know that a special cancellation rule exists to protect borrowers' interests.
- Debt consolidation loans. Debt consolidation loans were created to make the settlement of one's debt easier to handle. Instead of making several minimum monthly payments on various accounts, this repayment strategy involves obtaining a new loan to combine and cover the other loans or debts.
Pros and Cons
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Cons
How to apply for a loan in the US?
- Pre-qualification. A potential borrower will get the list of loan details and items needed to pick and submit to the lender during this stage. The list may include documents to prove the identity, income, address, monthly expenses, etc. Once the information is submitted to the lender, pre-approval arrangements get started.
- Loan application. At this stage, a borrower completes the paper application or the electronic version of the application using a lending platform or a particular app.
- Application processing. As the application is received by the credit department of the financial organization, it has to be checked for accuracy and comprehensiveness. An applicant should fill out all required fields correctly. Otherwise, credit approval may be challenging. The incomplete application may be returned to the client.
- Underwriting stage. The lender runs the application by reviewing various components, including risk scores and credit scores. Also, many financial organizations have their own evaluation system with specific criteria that help measure the borrower's capacity to pay.
- Credit decision (loan approval). After studying the detail, a lender decides to lend money or reject an application.
- Loan funding. After the loan documents are signed, a lender may require additional time for legal and compliance reasons.
Requirements
- Credit history and score. If a potential borrower hasn't established a credit profile yet, it's time to start one now. There is the main reason for building a good credit score: with a trustworthy credit report, you can qualify for a loan with favorable repayment terms and interest rates whenever it is needed. Lenders will check the credit report to determine the borrower's responsibility when handling his finances and financial obligations. The three-digit score, sometimes known as the FICO Score, usually ranges from 300 to 850. Three major credit bureaus have scoring systems that differ from each other, and therefore the score you receive from each agency could be different.
- Minimum income requirement. Lenders will request documentation that proves that the minimum income requirement is met.
- Debt to income ratio index. Lenders measure the ability to repay the debt considering various variables. The borrower's index must be less than 50% to be eligible.
- Social Security Number. Most lenders require SSN, although there are options that accept ITINs.
- Age. Minimum age limits differ from one state to another. In most states, borrowers need to be over 18 years old, but there are some exceptions. In Nebraska and Alabama, it's necessary to be at least 19 years old. The highest age requirements are in Colorado and Mississippi (at least 21 for all types of loans).
- Official identification. With this document, the bank or financial institution will be able to obtain more information about the borrower: name, address, and date of birth. The identification issued by the National Electoral Institute (INE) or a valid passport is required, and foreigners must have the resident card issued by the corresponding immigration authority.
- Minimum annual income. The minimum income required for taking a loan depends on the lender. Usually, people with $15,000-$20,000 annually can look forward to receiving a minimum loan.
Required documents
- Driver's license
- Social Security Number (SSN)
- Passport
- The state ID
- Military identification
- Certificate of citizenship
- Confirmation of residence. Utility bills (water, electricity, cable, etc.) / Rental agreement / Home insurance or rental insurance.
Loan Amount. Determine how much money you need to borrow and ensure the loan amount offered by the lender meets your needs. Avoid borrowing more than necessary to prevent overextending your finances. Credit Score Requirements. Understand the minimum credit score requirements of the lender and ensure your credit score meets or exceeds this threshold. Higher credit scores typically result in better loan terms and lower interest rates. Prepayment Options. Check if the lender allows early repayment of the loan without penalties. Having the flexibility to make extra payments or pay off the loan ahead of schedule can save you money on interest charges. Customer Service. Evaluate the lender's customer service reputation and responsiveness. Choose a lender that provides excellent customer support and is readily available to address any questions or concerns. Loan Purpose Restrictions. Some lenders may impose restrictions on how you can use the loan funds. Ensure the loan can be used for your intended purpose, whether it's to consolidate debt or make some home improvements. Financial Stability of the Lender. Research the financial stability and reputation of the lender before committing to a loan agreement. Choose a reputable lender with a track record of reliability and transparency. Read the Fine Print. Carefully read the loan agreement and all associated documents before signing. Pay attention to the terms and conditions, including any clauses or provisions that may impact your rights and obligations as a borrower.
In Finanso, we've carried out a comprehensive analysis of over 100 lenders, assessing them based on 35 different parameters across six key categories: accessibility of loans, customer relations, quality of service, interest rates, and transparency of conditions. We carefully considered the most critical factors in selecting a lender in each category. These factors include interest rates, available loan amounts, minimum credit score, minimum income, application fees, and the speed at which funds are transferred. At Finanso, we highly value our users, which is why we also focus on the quality of customer service, user reviews, and additional features that can aid our users in making a well-informed decision. Our ultimate goal is to provide insightful recommendations and expert advice to assist you in selecting a lender that best caters to your specific needs.Important
How to Choose a Lender
Methodology