Have you ever been in a situation where you needed a bit of money in an instant? Then, you know how frustrating it is, especially if you have no savings.
Fortunately, a personal loan helps through a tough time and smooth your finances.
Personal Loan Overview
A personal loan is one of the fastest-growing consumer debt types. It is also an easy way to consolidate debt, make a large purchase, or pay emergency home repairs. Generally, it comes with a lower interest rate than a credit card. That is why it is commonly used to consolidate different credit card debts into a lower payment cost per month.
Personal Loan Types You Should Know
While most personal loans come in the form of unsecured with fixed payments, you can find other types. When choosing a specific personal loan type that will work best for you, keep in mind that you depend on several factors like how long you should repay the loan and your credit score.
Below are the types of personal loan you should know:
1. Unsecured Personal Loans
Unsecured personal loans are not backed by collateral like a car or home. This loan appears to be riskier on the lender’s part, so they may charge a little higher annual percentage rate (APR). Beware that APR refers to the total cost of the loan and comes with interest rate and fees.
Instead of requiring collateral, lenders rely on credit scores to decide the amount of loan you can borrow and its rate you will pay. For instance, having good credit means you can take advantage of a lower rate.
Do not worry if you have bad credit; you can still be granted an unsecured loan. However, you will end up paying a higher rate to offset the risks the lender that may take on.
2. Secured Personal Loans
A secured personal loan generally requires collateral. Meaning, the lenders will have access to your savings account or a valuable item. Most of the time, banks require a savings account. Pawnshops often require a variety of valuable things to secure a loan.
In some instances, lenders accept RVs and boats as collateral. If you fail to repay the loan, the lender has the right to keep your property. Other secured loans include car loans secured by a car title and mortgages secured by a house.
Several online lenders, credit unions, and banks offer secured personal loans, where you are allowed to borrow against your personal savings, car, and other assets. Since the loan is less risky for the lenders, secured personal loans have lower rates than unsecured ones.
3. Fixed-Rate Loans
Personal loans often carry fixed rates. Meaning, the monthly payments or installments and rate stay the same throughout the loan term. If you want a consistent monthly payment and concerned about skyrocketing rates on long-term loans, a fixed-rate loan is an excellent option.
With a fixed rate, you have nothing to worry about the payments changing as it is easier for you to manage your budget.
4. Variable-Rate Loans
When you choose variable-rate loans, you need to deal with interest rates tied to benchmark rates set by the banks. The rate on loan and the total interest costs and monthly payments might rise or fall depending on how the benchmark rates will fluctuate.
Typically, variable-rate loans come with a lower annual percentage rate than fixed-rate loans. This type of loan also carries a cap that may limit how much the rate can change over the life of the loan and a specific period.
For instance, if you want a loan that involves a short repayment period, a variable-rate loan is right for you. That is because the rates can potentially rise but will not surge in the short term.
5. Co-sign Loans
Borrowers with no or think credit histories may not qualify for co-signing loans on their own. If the borrowers fail to repay the loan, a co-signer will do it. Meaning, a co-signer serves as insurance for the lenders.
If a co-signer with strong credit, the chanced to qualify for this type of loan increases. Additionally, you can get more favorable loan terms and a lower rate.
6. Debt Consolidation Loans
A loan consolidate other debt in one place to make it easier for you to pay off and manage. Most of the time, debt consolidation loans are unsecured personal loans. You can save money while getting out of debt as quickly as possible if you pay less interest.
You can use a debt consolidation loan to pay off credit cards, which can improve your credit utilization score. However, you have to be careful with it because once you free up space on your credit card, there is a big chance that you will be tempted to use it again. As a result, you will be in a worse situation.
Additionally, debt consolidation loans carry lower APRs than rates on the existing debts. That is to help you save on interests. It also simplifies the debt payments as it combines all the debts into a single, monthly payment.
7. Personal Line of Credit
With a personal line of credit, revolving credit is involved. It is more like credit cards than personal loans. Instead of getting cash, you will have access to a credit line. You can use this credit line to borrow on an as-needed basis. The interest is paid only based on what you have borrowed.
When you have to borrow for an emergency or ongoing expenses, you take advantage of the personal line of credit.
What Are Other Loan Types Available?
Besides the types of personal loans mentioned above, you can also take advantage of other loan types, such as:
Payday loans are unsecured loans. However, you often repay them on your next payday instead of installments over a period. The amount is likely to be a few hundred dollars or less.
With payday loans, you have to deal with risky, high-interest, and short-term loans. In most cases, borrowers end up taking out additional loans once they notice that they cannot repay the first loan. As a result, they are trapped in a debt cycle.
Credit Card Cash Advance
Credit card cash advance allows you to use a credit card to get short-term cash loans from ATMs or banks. While it offers convenience, it is still an expensive way to get cash.
Besides dealing with higher interest rates than those for purchases, you also have to pay cash advances fees. These fees are often as much as 5% of the borrowed amount or a dollar amount from $5 to $10.
Pawnshop loans work like secured personal loans. It allows you to borrow against an asset like electronics or jewelry, and you will leave it in the pawnshop. If you fail to repay the loan, the pawnshop has the right to sell your asset.
Beware that pawnshop loan rates are very high. In fact, they can run more than 200% APR. However, they tend to be lower than payday loan rates. Plus, they help you prevent damage to your credit. If you fail to repay the loan, debt collectors will not pursue you; you will only lose your property.
Generally, a vacation loan is an unsecured personal loan. You can use this loan type when you are going on a trip. On the other side, you may need to spend several months and even years on repaying the loan.
Credit Builder Loans
With credit builder loans, you can gain credit for the first time or rebuild your credit. These loans tend to be unsecured or secured with savings accounts, depending on the lenders’ terms. If you consistently make on-time payments, expect your credit score will improve. It also opens up savings and other financial opportunities.
Most credit builder loans come with relatively low balances, and you can pay them off over a few months. However, a secured loan means that stopping your payments can lead to collateral loss.
Generally, wedding loans are unsecured, and like vacation loans, they are meant for a particular purpose. If you have good credit, these loans make sense for your wedding preparations, and you can also get low interest rates. Once you modify your plans, borrow a small amount, or save up as much as you can, you have the best time to cut down the amount you wish to borrow.
To wrap it up, personal loans help you get the amount you need for various purposes. However, you have to be careful every time you borrow money. It is best to borrow what you need and pay the loan on time and as quickly as possible.