Emergencies, big purchases, and other surprises can change your financial situation fast. Even if you have money in a savings account, these situations have become tougher in recent years. That's because purchasing power has remained roughly the same, but the cost of living has grown exponentially. Loans are nothing new, of course, but they are an option that more people have needed in recent years. The first step to getting a loan is knowing your financing options. Below, you'll find an explanation of different business loans, personal loans, and alternative financing options.
First, you have personal loans. These loans are used to fund people's personal expenses, such as medical bills, college, car purchases, and housing.
General Personal Loans
You can find several types of personal loans, many of which have specific labels. Some, however, are just called "personal loans," and they don't have many specifications attached. These loans are flexible and come from a lot of sources. Because of this flexibility, you can generally use a personal loan on anything other than buying a car, buying a home, or getting a college education. Interest rates for these loans can be bigger than the interest rates for auto loans and mortgages, though a lot will depend on your credit score, collateral, and whether you choose a secured or unsecured loan.
Home Loans and Equity Loans
Next, there are loans that center around your home. Home loans, or mortgages, are loans that people use to buy homes. With a mortgage, you don't have to pay for the full price of your new house upfront. Rather, a bank or other financial institution will pay for part of the home, and you'll pay the institution back, with interest, over a period of years. A mortgage can last for as few as 10 years or as many as 30, so this kind of loan is a long-term commitment. It is, however, a more beneficial commitment than paying rent, especially when it comes to your taxes.
Equity loans are loans that let you borrow against the value of your home. In other words, your house becomes the collateral in an equity loan. That's why it's especially important to be sure that you can pay off your loan before you commit to it. Still, an equity loan may let you access more funds than you might get from another type of loan. It all depends on how much your home is worth.
Student loans are a type of personal loan that help students pay for the cost of college. Students may use their student loans on tuition, campus housing, books, and other costs that are directly associated with attending college. Student loans come from both government sources and private sources. Government loans tend to have lower interest rates.
For most American adults, a car is a necessity. Not everyone lives in an area with good public transit, and even fewer live close enough to their workplace to walk every day. However, most people also can't afford to pay for a car upfront, and that's where auto loans come in. Auto loans help cover the cost of a new car. Most people pay off their auto loans in 2-3 years.
Of course, people don't just need loans for personal reasons. Many business owners also seek loans to cover costs during emergencies, business expansion, and slow seasons. Business owners have several loan options to choose from.
You might think of term loans as the business equivalent of general personal loans. These loans are flexible and fairly non-specific. If you secure a business term loan, you can use that money to pay for almost any business-related cost. Then, you'll make regular payments on that loan over the course of 1-5 years.
Working Capital Loans
Working capital loans are similar to business term loans, but they come in smaller amounts and have shorter terms. Business owners use these loans to cover daily expenses like supplies and payroll.
SBA loans come from the Small Business Association, an organization of the US government. While these loans come from banks and other private financial institutions, they're backed by the government. These loans have many benefits, including low interest rates. However, the application process can get competitive, and these loans can be difficult to get.
Loans can make excellent options when you need to make a major purchase or spend a lot of money over time. However, many people would prefer to minimize their debts as much as possible. Avoiding debt completely isn't always an option. However, there are several things that you might do so that you can afford to borrow less money.
Business Loan Alternatives
Some loan alternatives work specifically for businesses. If you're a business owner looking to minimize your company's debts, here are some options that you can use.
Business Lines of Credit
First of all, there are business lines of credit, which work a lot like credit cards but on a larger scale. With a business line of credit, the borrower gets a credit limit. The borrower can then borrow against that limit until the limit runs out. Say, for example, that a business owner has a credit limit of $100,000. If they borrow $25,000 from that limit, they now have $75,000 left from which to borrow. If the business owner pays back that $25,000 without borrowing any more money, then the credit limit resets at $100,000.
Business lines of credit are loans in the most technical sense, since they do involve borrowing money. However, they provide a long-term solution, so business owners don't have to repeatedly apply for loans. Business lines of credit can help with recurring expenses such as restocking inventory.
Merchant Cash Advances
A merchant cash advance might make a good choice for you if your business relies on clients who use credit and debit cards. Basically, the merchant cash advance provider can give you the cash from your credit card sales upfront. In exchange, the provider will receive a portion of your future credit card sales. Merchant cash advances can work well in emergencies, but keep in mind that they do have high interest rates because they come from businesses other than banks. If possible, consider other options first.
Invoice factoring, or accounts receivable factoring, provides a quick way to obtain cash fast without going into debt. If you choose invoice factoring, you can sell your invoices to a buyer at a discount. You get the cash upfront, and then when the client pays off the full amount of the invoice, that money goes to the buyer.
Personal Loan Alternatives
You have a few alternatives to personal loans, too. Many people are looking for loan alternatives these days, especially in light of today's high student loan costs.
Crowdfunding has unfortunately become a necessity for a lot of people in this day and age, especially for medical costs in the United States. Nevertheless, crowdfunding remains a useful tool. People can use crowdfunding sites to raise money for their goals, and in some cases, they can raise that money quickly. If you use crowdfunding, you'll need to leverage social media to make sure that your fundraiser gets enough attention.
Lowering Education Costs
Most college students can't completely avoid loans, but many students can reduce their loan usage as much as possible. One option, for example, is to take all of your general education courses at a community college before transferring to a four-year school for the courses that relate to your major. Community colleges are significantly cheaper than four-year schools, so you can save a lot of money with this approach.
Which Loans Should You Avoid?
Now that you've seen some loan options and loan alternatives, are there any types of loans that you should avoid? Definitely. Not every loan is the same, and not every lender is the same. The worst loans are difficult to pay off and can leave you in debt for decades. Here are some things that you should avoid.
Payday Loans and Auto Title Loans
A payday loan is a small, short-term loan that's usually paid back within a few weeks. A payday loan is essentially a cash advance on a person's paycheck, and the amount of the loan is often due on the borrower's next payday, hence the name. These loans are inherently predatory. They charge extremely high interest rates, and they take advantage of people who need emergency cash. Payday loans can trap unsuspecting people into an endless cycle of debt.
Auto title loans often come from the same people who offer payday loans. They're similar to payday loans because they offer immediate cash. However, auto title loans require the borrower's car title as collateral. Like payday loans, auto title loans come with high interest rates and take advantage of struggling individuals.
In-House Auto Financing
If you're buying a new car, you have a few options to finance that purchase. One option to avoid is in-house financing. Car dealerships offer their own loans for buyers, and some people choose this option for the convenience. However, these loans have high interest rates, and they generally take longer to pay off than bank loans. A better option is to get a loan from a bank before visiting the dealership.
Finally, if possible, avoid loans from megabanks. Though not as bad as payday loans and other predatory loan options, megabank loans come with difficulties of their own. For example, it can be tough to get approved for a loan in the first place. Megabanks don't have the time to consider specific circumstances, so they'll stick with the loans that will make them the most money.
For another thing, megabanks partner with other megabusinesses, like Amazon and Walmart, to keep small businesses struggling. Local economies die under these corporations, while smaller institutions help local businesses stay up and running.
Which Loans Make the Best Choices?
While avoiding the loans listed above, you still have many positive choices. The key is getting your loan from the right source. The best loans, both for borrowers and for the borrowers' surrounding communities, come from community banks and credit unions.
Community banks are small banks that serve specific communities. While a megabank will have branches all around the world, a community bank will just have one or a few.
What makes community banks better than megabanks? A few factors. First, community banks are small businesses, which means that they help their local economies. They create local jobs, and they invest money back into their communities. They help defend local economies against the likes of Walmart and Amazon.
Community banks may also approve loans that megabanks won't approve. Although credit scores and collateral still matter, community banks have more time to consider the big picture and the circumstances that surround the loan.
Credit unions offer all of the same services that banks offer, including loans. The difference is that credit unions are nonprofit organizations that are owned by their members. This difference comes with some advantages. For one thing, credit unions are more focused on serving their members than making money for the few people at the top. Decisions are based on what works best for the members, and those members get a say in major decisions. Also, because credit unions aren't focused on making as much money as possible, they can offer lower interest rates than megabanks.
How to Find the Right Loan for You
The best way to find the right loan is to start with the right source. Community banks and credit unions make the best choices, but which community bank or credit union should you choose? You can make the search easier by using Bundlefi. We've partnered with community banks and credit unions, and we match those community banks and credit unions to loan-seekers who are tired of megabanks and big corporations. Bundlefi can make your loan search simple. Take a look at Bundlefi now to see the difference and find the loan that will work best for you.