Lesson 5 of 7 12 min
Types of Loans
Installment vs. revolving: auto, student, personal, and home loans.
Written by Mateo LermaLast reviewed 4 sourcesEditorial standards
All lessons in Credit & Debt
Step 1: The lesson
What are the main types of loans?
Credit cards are revolving credit. Most other loans are installment loans: you borrow a set amount, then repay it in equal payments over a set time.
Key term
Principal and term
The principal is the amount you borrow. The term is how long you have to repay it — for example, 60 months.
- Auto loans — for a car. The car secures the loan.
- Student loans — for education. Federal student loans have protections and repayment options that private loans usually don't.
- Personal loans — for almost anything. Usually unsecured, so rates depend heavily on your credit.
- Mortgages — for a home. The home secures the loan, and terms are often 15 or 30 years.
Key term
Secured vs. unsecured
A secured loan is backed by something the lender can take if you stop paying — like repossessing a car. An unsecured loan isn't, so it usually costs more.
The key tradeoff is term. A longer term makes each payment smaller but costs more interest in total. Compare loans by APR and total cost, not just the monthly payment.
Think hard before co-signing
A co-signer is fully responsible for the loan if the borrower doesn't pay. It shows up on the co-signer's credit, and missed payments hurt both people.
Step 2: See it
A $20,000 car loan at 7% APR: total interest by term
For a $20,000 loan at 7% APR, a 3-year term costs about $2,232 in interest, a 5-year term about $3,761, and a 7-year term about $5,356.
Step 3: Real-world example
"What monthly payment works for you?"
At a car dealership, a salesperson asks Alex what monthly payment fits the budget. Alex says $300.
The dealer finds a way: a 7-year loan on a $20,000 car at 7% — about $302/month. It fits. But the total interest is about $5,356, compared with $2,232 on a 3-year loan.
A better approach: decide on a total price first, get pre-approved by a bank or credit union so you know your rate, and choose the shortest term you can comfortably afford.
Step 4: Try it
Loan calculator
Change the term from 3 to 7 years and watch the monthly payment and total interest move in opposite directions.
Your numbers
Results
Monthly payment
$396.02
60 payments at 7% APR
Amount borrowed
$20,000
Total interest
$3,761
16% of what you pay
Total of payments
$23,761
- Principal (amount borrowed) $20,000
- Interest $3,761
Show year-by-year breakdownHide breakdown
| Year | Principal | Interest | Balance left |
|---|---|---|---|
| 1 | $3,462 | $1,290 | $16,538 |
| 2 | $3,712 | $1,040 | $12,826 |
| 3 | $3,981 | $772 | $8,845 |
| 4 | $4,268 | $484 | $4,577 |
| 5 | $4,577 | $175 | $0 |
Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.
Step 5: Knowledge check
Quiz: Types of Loans (3 questions)
Answer each question, then check your answer to see the explanation. Retake it as many times as you like.
Question 1 of 3
Step 6: Summary
Summary: Types of Loans
Installment loans have a fixed amount, fixed payments, and an end date. Secured loans are backed by collateral; unsecured loans aren't and usually cost more. Longer terms lower the payment but raise the total cost. Compare APR and total cost, and be careful about co-signing.
Step 7: What you should remember
Key takeaways: Types of Loans
- Installment loans: fixed amount, fixed payments, set end date.
- Secured loans have collateral that can be taken if you don't pay.
- Longer term = smaller payment, more total interest.
- Shop by APR and total cost, not monthly payment.
- Co-signers are fully on the hook.
Key terms in this lesson
Finished the lesson?
Mark it complete to track your progress.
Sources and further reading
Rules, rates, and official figures in this lesson are based on these sources. People and numbers in examples are hypothetical.
- 1.Auto loans (opens in a new tab)
Consumer Financial Protection Bureau · consumerfinance.gov
- 2.Student loans (opens in a new tab)
Consumer Financial Protection Bureau · consumerfinance.gov
- 3.Mortgages (opens in a new tab)
Consumer Financial Protection Bureau · consumerfinance.gov
- 4.Federal Student Loans (opens in a new tab)
Federal Student Aid (U.S. Department of Education) · studentaid.gov
Cite this lesson
Financial Literacy Club. (2026, September). Types of loans. https://learnwithflc.org/courses/credit-and-debt/loans
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