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What Are The Different Types Of Personal Loans?
No one wants to be in a position where they have to rely on a loan to help them out financially, but we all have to accept that we may end up in that position eventually.
Personal loans are one of the most common types of loans that people end up taking out at some point in their lives, and the reason for this is that personal loans do not have a specified purpose.
While mortgages, auto-loans, student loans, and so on have very specific purposes, personal loans can be for almost anything… Almost.
But there are also many types of personal loans that you can get as well, and each type is more suitable to a person for different reasons. So, before you go hunting installment loans in Lexington, let’s take a look at the types of personal loans.
Explaining Personal Loans
Personal loans are a type of installment loan, which means you pay them back in installments. This loan is given to you without a need to even use the money for anything specific.
Some lenders will allow you to check your offers online without it affecting your credit score, but others won’t, and when you apply you have to be aware that you will need to disclose your personal and financial intel and agree to them pull hard credit.
This can impact your credit score negatively, but only in a very minor way and temporarily.
Should you qualify you will get different offers, and will be able to repay in various periods, with different interest rates and payment rates.
Interest rates for these loans are generally at a fixed rate, and they will often stay set in monthly payments for the entire duration of the loans' activity. You may have to pay a fee for admin or origin as well, and you will not get this back.
Should You Avoid Any Personal Loans?
There are three particular types of personal loans that we recommend staying away from. These are payday loans, title loans, and pawn shop loans.
Payday loans are short term, and they come with giant fees. They are not always bad, especially if you are wise with your money, but they do tend to leave borrowers in a cycle of debt that often ends in them taking out new loans to pay off old ones.
Title loans are easy, but you have to use your car as collateral. Repayment terms can be short, and interest rates high, it can leave you worse for wear in the long run, especially if you cannot afford it and end up on the receiving end of a repossession.
Pawn shop loans can be a good alternative to payday loans, but you do risk losing your items to the pawnbroker, and you will often have to pay a fee if you want to extend the term of repayment.
What Are The Types Of Personal Loans?
So, knowing all this above, what are the different types of personal loans that you can get?
Here are the main types of personal loans that you will likely run into.
Unsecured loans are loans that are not backed up by collateral to protect the lender. Instead, they will usually have a higher cost in their interest rates, which means they can land you with a higher APR.
That being said, you are not putting any of your possessions at risk by taking out an unsecured loan.
You will still be assessed on your credit score, income and debts, and you could get a rate from 6 to 36%.
Secured loans are the loans that are safe for a lender as you have to put down collateral. This could be your home, car or other worldly possessions. This is often the case with mortgages and auto loans.
If you default on the loan though, your home/car can be repossessed.
A majority of personal loans are fixed, meaning that the rate at which you pay and the monthly installments you make to pay back the loan will stay the same for the duration of the loan.
These fixed-rate loans are great for consistency in your monthly payments on long term loans.
Co-signed loans are best if you have a bad credit score and cannot qualify on your own.
Someone else will co-sign the loan, but they will not have access to your funds. This person will still be in trouble if you do not make the payments, however.
A person who is a co-signer will usually have great credit.
Variable-rate loans are benchmarked by banks, and depending on how this rises and falls your loan will do the same. You will usually get a lower APR for this, and there will often be a cap on how much it can change over a time.
They are not massively available, but these are usually found on shorter-term loans.
Debt consolidation personal loans are actually a popular type of personal loan. This type of personal loan will take all the loans you are currently repaying and roll them into one big lump sum.
This is ideal as it reduces how much you have to pay. How?
Well, if you have multiple loans out at different interest rates, then this will cost you more in the long run, when you consolidate your loans into a debt-consolidation personal loan you only have the one interest rate that you have to deal with.
Line Of Credit
Personal lines of credit are revolving credit, and they are much like a credit card, more so than a personal loan. Instead of getting a lump sum of money you will gain access to a line of credit in which you can borrow from as you need to.
With this you will only have to pay interest on the money that you borrow
It works best when you need to borrow money for ongoing fees, or if you have an emergency.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes