The ABCs of Loans: Avoid the Borrowing Blues

Everything you need to know about the different types of loans.



There are going to be times when you will need to borrow money. You may need a new car or are considering a home purchase and need to take out a loan. If you have a credit card, then you already have a personal loan with a revolving line of credit. When you need to borrow, it’s good to understand the pros and cons and terms and tiers of loans and loan applications.

Here we present a primer reviewing the most common types of loans and things to consider when the time comes to borrow money.

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Chapter 1

Loan Application Basics

When the time comes to borrow money or take out a loan, there are basic criteria to consider before you sign on the dotted line.

Interest Rates 

First, consider the interest rate. Interest rates are where most banks, credit unions, and other lenders tend to compete when it comes to issuing loans or credit cards. You want to look for lower interest charges. The lower the interest charged, the more you will save over the life of the loan. Interest rates may not be your primary criteria when it comes to borrowing, but they are a good place to start.

Terms and Tiers

You also want to shop for loan terms that suit your personal finances. Loans offer different terms built in that could be to your advantage. For example, if you are having a cash shortfall but know there will be more money available in the future, you might get a better rate with a loan that has a balloon payment built in. If you need a student loan, for example, you may want to make larger payments later when you have more earning power. Some home loans are interest-only for an initial period or have adjustable rates, which can mean lower payments at the start of the loan. This can be advantageous if you plan to sell before the rates adjust or expect your financial situation to change. Review the terms of a loan and any changes that may affect your ability to repay.


Be sure you understand the penalties for missed or late payments. Even if you pay your bills on time, you never know when you may have a financial setback that may mean you miss a payment. Be sure you understand the penalties for nonpayment. Failure to make payments will likely mean late fees and, in the worst case, loss of your car or even your home.

Loan Benefits

Many lenders build perks into their loans to attract borrowers. Look for benefits that may be valuable, such as discount loan rates, waived fees, a payment holiday, or a grace period to repay.

Secured and Unsecured Loans

Some loans require security in the form of collateral—usually the car in the case of an auto loan, the property in the case of a home loan, or something of tangible value to guarantee payment. An unsecured loan is issued based on the borrower’s creditworthiness, which is directly related to their income and credit score.

Getting Loan Approval

To qualify for a loan, you will need to meet specific criteria. Your credit score is the primary barometer for your creditworthiness. Your credit score is based on your credit history, how long you have had credit, how much money you owe, and other factors. Your debt-to-income ratio, which is the amount of money you earn compared to outstanding debt, is another important factor. Ideally, you want a debt-to-income ratio below 43% for a home loan and even lower for other types of loans.

These are just some of the basic considerations for applying for a loan. Now let’s review the most common types of loans.

Chapter 2

Home Loans

Taking out a mortgage or home loan is one of the most common types of loans. Buying a home is usually the biggest expense anyone will make, so a home loan is a big commitment with specific criteria for borrowing and repayment.

Types of Mortgage Loans

There are different types of mortgage loans with different payment terms: 

  • Fixed-rate mortgage: A fixed-rate home loan is the most common type of home loan and is a fully amortized loan where the interest rate remains unchanged for the life of the loan. The advantage of a fixed-rate loan is the loan and interest amount are calculated as a fixed monthly payment, which makes it easier to accommodate in your household budget.

  • Adjustable-rate mortgage: An adjustable-rate mortgage loan (ARM) has a rate that fluctuates with the market index. As market interest rates go up and down, so does the interest rate of the home loan. With an ARM, you may start with a good rate, but be prepared for it to increase over time. 

  • VA loans: The Veteran’s Administration backs home loans specifically for veterans and service members. These loans feature a low down payment or no down payment, no private mortgage insurance requirements, and other benefits.

  • FHA and HomeReady loans: The Federal Housing Administration (FHA) offers FHA home loans through banks and credit unions to first-time homebuyers and low-income families. Qualified applicants can borrow up to 96.6% of the home value and have more lenient credit requirements to qualify. HomeReady loans are backed by Fannie May to help low- and moderate-income families qualify for a loan and have benefits such as lower mortgage insurance rates. 

Criteria for a Home Loan

To qualify for a home loan, you will need to meet specific criteria.

You will need to have a down payment for the property. Most home loans require a down payment of at least 20%. First-time homebuyers have an advantage here and can often qualify for a home loan with a 10% down payment or even less.

Before applying for a home loan, you should calculate what you can afford. Some experts recommend the 28/36 rule, where no more than 28% of your gross income and no more than 36% of your monthly debt goes to a mortgage. Factor your home loan into your debt-to-income ratio. Once you know how much you can afford, you can determine how much you can borrow based on the down payment.

When calculating home loan costs, be sure to include additional expenses such as home insurance and property taxes. If you are making a down payment of less than 20%, you may have to pay mortgage insurance as well. There also will be one-time closing costs which typically range from 2% to 5% of the home purchase price.

Shopping for a Lender

You can get a home loan from multiple sources. Your bank or credit union can underwrite a home loan, and there also are independent mortgage brokers. When shopping for a home loan, look for the best interest rate and choose a reputable lender that you can trust.

Once you find a lender, you should be prequalified for a home loan before you start looking for a house. Being prequalified provides verification from the lender that you are likely to qualify for a specific home loan amount. Once you find a home and are ready to make an offer, you then should be preapproved for the loan, which means the lender runs a formal credit check and takes all the steps needed so you can borrow the money.

Be sure to shop for additional perks that may help you with a home loan. For example, some lenders pay closing fees to entice borrowers.

Home Loan Refinancing

Since a home is likely to be your biggest asset, you also can take advantage of your home value by tapping into your home equity, which is the difference between the market value of your home and what you owe on it. 

There are different ways you can cash in on the increased value of your home:

  1. Refinancing your home loan

    Taking equity out of your home gives you the extra cash you can use to remodel, invest in your retirement fund, or for an emergency such as paying medical bills. If the equity in your home is more than 20% of its market value, or if the current home loan interest rates are lower than your home loan interest rate, it might be time to refinance. If the mortgage interest rate is more than a percentage point lower than your current home loan rate, refinancing at a lower rate can save you a lot of money over the life of a home loan.

  2. Taking a second mortgage

    Rather than refinancing, you can also tap into your home equity with a second mortgage. You may be happy with the terms of your current home loan, so taking an additional loan using your home as collateral is one way to turn the value of your home into cash.

  3. Getting a home equity line of credit (HELOC)

    Another way to tap the equity in your home is with a HELOC. A HELOC is a revolving line of credit against the equity in your home. Since you have revolving credit, you can borrow as much or as little as you need, and interest is charged on what you borrow, much like a credit card.

If you want to know more about how to get a mortgage loan or are ready to apply for one, be sure to use our “Mortgage Paperwork Checklist” to get started.

Chapter 3

Auto Loans

Having a car is a necessity for most families, but buying a new or used vehicle can put a strain on family finances. That’s why most people take out an auto loan.

To qualify for an auto loan, you must meet basic criteria based on your income, your credit score, and other factors. With an auto loan, the car is your collateral. Most lenders will lend you more than the value of the car to cover additional expenses such as registration. If there is concern about your credit history, you may need to make a down payment of 10%-20%.

When considering an auto loan, you also want to think about the auto loan interest rate and the length of the loan. Car loans are typically available for terms up to 84 months. You can take out a loan with a longer term when the initial loan amount is higher or the car is newer, but you will want a shorter loan term for a less expensive vehicle or a used car. (You don’t want to make payments on a car that no longer runs.) Determine how long you expect to keep the car before you trade it in and plan your borrowing accordingly. And use a car loan payment calculator in advance to make sure they fit your household budget.

Dealer vs. Credit Union

When considering where to get your car loan, compare the terms offered by the car dealership to those offered by your credit union. The dealership wants to sell you a car, so they may recommend manufacturer financing, where the automaker funds the loan. As you consider where to get your car loan, compare the terms offered by the manufacturer to those offered by your credit union. The manufacturer may offer benefits such as 0% interest for the first few months. However, you may have to pay higher costs on other parts of the loan—especially on used cars. Be sure to calculate your out-of-pocket expenses for the life of the car loan.

When you get an auto loan from your credit union, the process is like getting a home loan. You can get preapproved for a loan then prequalify when you find the car you want. Plus, the rate you get from your credit union won’t have any markups or hidden fees. Remember that if a lender has limits on the age or mileage of the vehicles, it’s for your own protection to help you make sure that your loan won’t outlive your car!

Leasing vs. Buying

Some people prefer to lease a car rather than buy one. An auto lease is like an extended car rental—the dealer continues to own the car, but you make payments, so you can drive it. A car lease usually requires a smaller initial payment and usually has lower monthly payments, but the leases tend to be for shorter periods than a car loan. If you plan to get a new car every few years or need a car for business, leasing may be a good option. However, there will be extra fees if you exceed the mileage allowed in the lease, and you will have to pay for any cosmetic damage when you turn in the car.

If you choose to buy rather than lease, then you own the vehicle, which means you don’t have to worry about extra mileage or damage. It also means you are free to sell the car or trade it in.

Loans for Other Vehicles

Your credit union also can provide a vehicle loan if you are interested in purchasing a motorcycle, RV or motor home, or boat. Talk to the loan officer at your bank or credit union to see what loan options are available.

If you are considering applying for an auto loan, talk to the loan specialists at iQ Credit Union. You also might want to take advantage of the iQCU AutoSmart program to help you find the right car and the right dealer.

Chapter 4

Personal Loans

There are times when you need extra cash in a hurry. You may have a family emergency, need extra money for unexpected medical expenses, or you may need a small bridge loan. Whatever the reason, you can always consider a personal loan.

A personal loan is a loan that you take out from a bank or credit union based on your creditworthiness. The financial institution agrees to let you borrow a sum of money at a specific interest rate. The interest rate depends on your credit history and credit score. The sum you can borrow depends on your income and other factors and your ability to repay the loan in a specific period.

There are many reasons to consider a personal loan, such as:

  • Special needs: You may have a family emergency, unexpected medical bills, or want to take a dream vacation with the family. When you need extra money for something special, you might consider a personal loan.

  • Debt consolidation: Taking out a personal loan to pay off credit card debt may be a wise move if you can save money. Be sure to check the interest rates of a debt consolidation loan against those of your credit cards to make sure you are paying less interest.

  • Building or restoring credit: If you are trying to restore your credit, making regular payments on a small personal loan can help boost your credit score.

Shopping for a Personal Loan

When shopping for a personal loan, you want to look for low interest rates, easy payment terms, and no hidden fees or penalties. For example, be sure you check that there aren’t monthly fees in addition to interest payments and that late payment penalties aren’t too severe. You might also look for debt protection insurance in case you find yourself unable to make timely payments.

A Personal Loan vs. a Line of Credit

Instead of a loan, you might consider a personal line of credit. When you take out a line of credit, you are borrowing a sum of money that is available when you need it. When you use money from a line of credit, you are charged interest on the amount you borrow, and you repay what you borrow over time, paying monthly interest on the outstanding balance. Some banks and credit unions charge fees to maintain a line of credit, and there may be other hidden costs. 

How to Get a Personal Loan

There are no fees for an iQ Credit Union line of credit, and it can be used for overdraft protection. It’s also eligible for debt protection insurance. If you need a personal loan from iQ Credit Union, you can get started with an online form, a phone call, or a visit to your local credit union branch.

Chapter 5

Commercial Loans

When you run a business, cash is the fuel that keeps things going. If you need extra cash for your business, consider a commercial loan. Commercial loans can be useful for a variety of business purposes, including:

  • Business expansion: You may need an influx of cash to expand your business. You may need additional inventory or have to cover unexpected operating expenses. When you need a fast influx of cash, a commercial loan may be exactly what you need.

  • Equipment: If you need to purchase additional machinery or you have to make emergency repairs to existing equipment, a commercial loan may be the answer.

  • Construction: You may need to build out your business space. A commercial loan can help you with expansion.

  • Real estate: Maybe it’s time you bought your own building. A commercial real estate loan can help.

  • Seasonal business: Some businesses are seasonal, relying on annual harvests, summer tourists, or holiday sales. If you need extra cash until business picks up, you also might consider a commercial loan.

Qualifying for a Commercial Loan

As with any other type of loan, you will have to qualify for a commercial loan. The criteria are like most loans. You will need:

  • Satisfactory credit score and borrowing history: Having good credit and good credit history will show you are a good credit risk.

  • Collateral: Depending on the loan, you may need collateral such as property or equipment with sufficient cash or equity to secure the loan.

  • Proof of revenue: You also will need to demonstrate that your business is making money with bank statements, tax forms, and profit and loss statements, usually going back three years.

  • Business plan: A business loan must be used for a qualified business purpose. A business purpose statement or business plan may be needed to demonstrate how you plan to generate revenue for loan repayment.


For fast access to cash, consider applying for a business term loan or microloan. Microloans can be used for anything from purchasing equipment and buying a commercial vehicle to remodeling your business or meeting other needs. iQ Credit Union offers speedy iQ microloans for up to $60,000.

Commercial Loan vs. Line of Credit

A commercial line of credit may also be an option for short-term funds. Rather than applying for a loan, a line of credit can provide extra money when you need it. And you only pay interest on the amount you use. Credit card loans also are available to businesses.

Business Loan Assistance

iQ Credit Union works with the Small Business Administration (SBA) and several other non-profit groups to help get loan approval if you cannot qualify on your own. iQ can also help you find assistance in writing a business plan and putting together income projections.

If you need a commercial loan for your business, talk to the business lending team at iQ.

Chapter 6

Credit Cards

Credit cards offer a different form of loan. Credit cards provide revolving credit, so you can use them to make purchases and only pay interest on the amount you use or the credit card balance.

Credit card interest rates vary widely, so when shopping for a card to suit your needs, balance the interest rate against other perks. For example, some credit cards offer points for every dollar spent. Others offer airline miles or travel benefits. Some cards offer cash back. Depending on your needs, the benefits may justify paying a higher interest rate or annual fees, especially if you plan to pay your credit card balance each month.

You can use credit cards to help rebuild bad credit. Using credit cards also can be useful to help you build credit to qualify for a loan in the future.

iQ Credit Union’s credit cards are Visa cards that offer reward points, low interest rates, travel benefits, and more. If you need to start building or rebuilding credit, you also might consider a share secured card from your credit union. A share secured credit card requires a security deposit of as little as $500.

Chapter 7

iQ Credit Union Can Meet Your Loan Needs

When it comes time to shop for a loan, credit unions work hard to offer favorable loan terms to members—and no credit union works harder for its members than iQ.

As an iQ member, you are eligible for our Member Perks program, which offers various advantages when it comes to loans, including:

  • Better interest rates

  • $250 off closing costs for home loans

  • Up to $150 off closing costs for a home equity loan

  • An additional 0.25% off the interest rate on auto loans

  • Concierge car shopping with Auto Mentors and Tonkin2U

  • And much more

The financial experts at iQ are happy to help you find the right loan to meet your needs. iQ offers a full range of financial services, including investment and retirement planning and insurance services. We can help you choose the right loans to fit your budget and your long-term financial strategy.

iQ Credit Union wants to be your financial resource for life. Talk to us about your financial needs, and let us show you why you should be part of the iQ family. 

Loan FAQs

Credit unions are interested in more than just lending you money. A credit union is a cooperative, and as a member, you have a share in the credit union. That’s why credit unions can offer members better interest rates, more attractive terms, and special deals on loans.

Credit unions such as iQCU offer the same loans as any other bank or financial institution. You can get home loans, car loans, personal loans, lines of credit, credit cards, commercial loans, and more. Consult your local branch to see what loans are available to meet your needs.

Each type of loan has its own terms and interest rates. Generally speaking, the larger the loan, the lower the interest rate. For example, mortgages currently are seeing low interest rates. Auto loans also tend to have extremely low interest rates because they are highly competitive. Loan interest rates tend to be lower if the terms of the loan are shorter, (e.g., a 24-month auto loan may have a better interest rate than a 72-month loan).

Loans are structured to be paid over time, but if you can make additional loan payments, you can save on interest. Some loans, such as home loans, front-load the interest, so making additional payments can mean you are paying more interest rather than paying down the principal. Pay down the principal first when you can to shorten the length of the loan and reduce the amount of interest you have to pay. With rolling credit, such as with credit cards or lines of credit, you won’t have to pay interest if you don’t maintain a balance.

Many factors go into choosing the right loan, including how much you need to borrow, your ability to repay the loan, your creditworthiness, and other factors. A good rule of thumb is to only borrow what you need, and don’t borrow more than you can comfortably repay. Your financial advisor can help you choose the right loan to meet your needs.

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