Understanding different types of loans

From the student loan to the mortgages, learn the difference between these four loans to  choose the one that best suits your financial situation.

It is ok to borrow money when you need to, and there’s a lot of reasons to do that. Since starting your dream business to buying your dream house or even going to college, sometimes it is necessary to get a loan to do something that you want to.

But there are different types of loans, and it is fundamental to know what are the differences between them to know which is better for you and your plans: between personal loans and credit card loans, there is always one that suits better on what you’re going to do with the money.

In this article, we are going to discuss the four main types of loans so you can decide which one is better for you.

What is a loan?

Before you get to know the different types of loans, you will need to understand what a loan is. A loan is a type of credit thar works in a simple way: a sum of money is lent to someone. In the future, the borrower of the money will need to repay it — sometimes, along with some finance charges and fees added to the value that was borrowed, making it more expensive than the value that was borrowed.

There’s somethings that the lender considers when someone asks for a loan like their income, credit score and debt levels. That’s why it is important to have a good credit score or, at least, work to have a good score. There are four main types of loans: the student loan, the auto loan, the mortgage and the loans for federal employees.

Student loan

The name is self-explanatory: a student loan is the type of loan that is used to pay for college. The money is usually used for tuition, but it also can be used to pay for room, board, books, supplies and other things that are used by college students.

A student loan is borrowed from the government or from a private lender and it has to be paid later. It is important to know that it is different from a scholarship: while the scholarship does not need to be paid back later, the loan has to be paid.

Auto loan

Auto loan is a type of loan destined to those who are trying to purchase a car or a truck — an automobile. It serves to make vehicles more affordable to people: a car is commonly the second most important purchase for a person, after just their home. The auto loan is classified as a simple interest loan, and it is usually paid back after a three to five years period.


A car can be the second most important purchase for a person, but a house will always be the first one. And that’s why the mortgage exists: this is a type of loan that allows the borrowers to buy a house or to borrow money against the value of a home you already own.

It works this way: the borrower and the lender make an agreement that the borrower will pay for the value that was lended plus interest. If it does not happen, the lender can take your property. That’s why the mortgage must be always paid.

Loan for federal employees

A loan for federal employees is a kind of loan destined for government workers, with special conditions for the payment. Usually, it has easier applications, with no or less credit score required and better loan offers. Some financial institutions even offer a referral system, where you get money for every work colleague that asks for a loan using your personal code.