LOAN WARS: A New Hope For People Who Don’t Understand Loans

Loans can be a tricky thing, and since you can’t use The Force to help you figure them out, take this infographic instead.

It’s not easy to get by in today’s world without borrowing money. After all, who has $250,000 to drop on a new home? For that matter, how many of us can plunk down $20,000 for a new car?

If you want to buy a big-ticket item today, the odds are good that you’ll be taking out a loan of some sort. But what if money talk makes you cringe? What if you don’t understand the difference between an interest rate and title insurance? What if you have no idea what the abbreviation APR stands for? (It stands for annual percentage rate, by the way.)

Fortunately, it doesn’t take an advanced finance degree to learn the basics of the various loan types you’re apt to encounter in your lifetime. Here is a crash course in how these loans work, and which ones offer better deals for you.

In general, secured loans offer lower interest rates. That’s because they offer collateral to lenders, meaning that they present these lenders with less of a risk. Collateral can be everything from a house, in the case of mortgage loans, to your new car, in the case of an auto loan. Collateral works like this: If you default on your loan, your lender can take your house, car or whatever collateral is behind your loan.

Mortgage loans are some of the most popular secured loans. The vast majority of homebuyers take mortgage loans to finance the purchase of their new residences. Interest rates on mortgage loans vary depending on the performance of the economy. In mid-2010, though, the average interest rate on a 30-year, fixed-rate $200,000 mortgage loan stood at 5 percent. That, by the way, is an extremely low rate for such a mortgage loan.

Another popular type of secured loan is the auto loan. The interest rates on these loans vary, too. In 2010, though, the average $20,000 auto loan came with an interest rate of 7 percent.

Home equity loans are another type of secured loan. In this type of loan, lenders will loan you money based on how much equity you have built up in your residence. A $20,000 home equity loan generally comes with an interest rate of 9 percent.

Unsecured loans, loans in which you are not putting up any collateral, tend to come with higher interest rates. That’s because lenders are taking on more risk by passing them out to you.

A $5,000 personal loan, for instance, will typically come with an interest rate in the range of 12.35 percent. Credit cards are a type of unsecured loan, too. As of 2010, the average interest rate on a credit card stood at 16.78 percent.

The worst type of unsecured loan that you can take out? Based purely on the interest you pay, it’d have to be a payday loan. These short-term loans – usually for no more than $500 – can come with interest rates as high as 400 percent. It’s little surprise, then, that so many state legislatures have introduced legislation to regulate the way payday lenders operate.