Personal Loan Types: Which One to Pick?
If you are planning to take out a loan for your unmet financial needs, a personal loan can be the best deal for you. With this loan, you can finance various expenses including emergencies, debt consolidation, and purchase of a big property. Personal loans are one of the best options because their rates are relatively low.
Before taking out a personal loan, it is essential to understand your financial needs. That will help you to apply for a purpose-specific loan. Bearing that in mind, you are likely to choose the most suitable loan to solve your financial problem.
After reading this article, you’ll get to understand the various types of personal loans and the pros and cons of each loan option.
Types of Personal Loans
Popular personal loans include unsecured, debt consolidation, fixed-rate, and variable-rate loans. But other types of personal loans are also available. The loan type that suits your needs depends on numerous factors including the loan term and your credit score.
1. Unsecured Personal Loans
When taking out an unsecured personal loan, you don’t have to back it with your property as collateral, making them riskier to lenders. As a result, the lenders charge higher interest rates on these loans to minimize losses when a borrower defaults payment.
An approval for an unsecured personal loan depends on the borrowers’ credit score. If you have a good credit score, your loan application will get approved quickly at a relatively lower interest rate.
- Work best for borrowers that don’t have assets to use as collateral
- Payments are predictable when you know your monthly installments
- The rates are relatively lower than other debts such as credit card debts
- Late payments may attract large amounts of penalties
- Charge higher interest rates and fees than secured loans
- Lenders may take loan defaulters to court
2. Secured Personal Loans
When borrowing a secured personal loan, you must back it with an asset that serves as collateral. You can use your car, house, and sometimes jewelry as security. If you fail to make payments, the lender will seize the property and resell it to recover the money.
Secured personal loans allow you to get funds at affordable interest rates without selling your property. You only have to specify the asset you are using as collateral. Examples of secured loans include car loans and mortgages.
Secured personal loans charge low-interest rates and fees because they are backed by collateral, making them less risky. Additionally, you can find these loans everywhere from reputable lenders.
You are at risk of losing your property if you default payments. The lender will seize the property and resell it.
Types of Secured Loans to Avoid
Payday Loans: You can get quick money with these loans, but they can be expensive in the long run. They have an average APR of up to 400%.
Car Title Loans: The loans are risky because you give away the title of yours in exchange for cash. You may lose your car when you fail to make payments.
3. Variable-Rate Loans
The interest rate on these loans is dynamic. They fluctuate depending on the benchmark rates that banks set. When that happens, your monthly loan payments will also rise and fall interchangeably.
- Have lower APRs compared to fixed-rate loans
- Payments will decrease if the interest rates fall
- Allows you to borrow what you need (with a line of credit)
- Payments are unpredictable making it difficult to budget
- Payments increase with an increase in the rates
- Some lines of credit have fees
4. Fixed-Rate Loans
With this loan, the interest rates are fixed, meaning your payments remain steady through the entire loan term.
- Payments are predictable, making it easier to budget with your finances
- Consistent interest rates and payments over time until you pay off the entire loan
- Suitable for people with a steady flow of cash
- Charge relatively higher interest rates and fees compared to variable-rate loans
- No extra payments even if you’re willing to increase your monthly payments
- You will still make the same payments also if the loan rates fall in the market
5. Debt Consolidation Loans
A debt consolidation loan can be helpful when you are overwhelmed with multiple debts. It involves taking out a new loan to pay all your existing debts so that you’ll be making a single payment every month.
Debts that most people consolidate to simplify their payments include payday loans, utility bills, credit cards, and medical expenses.
- Fast way of paying all your debts at better interest rates
- More efficient because you only have to make one payment every month
- Unlike other consolidation methods, qualifying for this type of personal loan is easier
Higher chances of landing onto more debts. For instance, you will find it easy to use your credit cards again after paying off all the liabilities.
6. Personal Lines of Credit
A line of credit is more similar to credit cards than with personal loans. Banks offer lines of credits to borrowers who have specific requirements. For instance, a bank can quickly provide lines of credits to their customers who keep money in that bank.
Lines of credit can be secured or unsecured. Being one of the most popular secured lines of credit, the home equity line of credit (HELOC) involves using a house as collateral.
HELOCs have relatively lower interest rates than a typical personal loan. The HELOC also have a tax advantage over other personal loans because the interest rates on your HELOC can be waivered if you use it to improve your home.
The closing costs and higher interest rates of lines of credit make them expensive in the long run.
When looking for a personal loan that will suit your financial needs, you ought to look for certain features. Such factors include upfront fees, the flexibility of payments, and terms and conditions of the loan. The loan option you are choosing should generally be affordable.
You can get personal loans that are cheap from reputable lenders. If you need affordable loans, click here to get connected with top financial institutions that offer loans that will work best for you.