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 is that personal loans have no specific purpose.
While mortgages, car loans, student loans, etc. have very specific purposes, personal loans can be for almost anythingâ¦almost.
But there are also many different types of personal loans you can get too, and each type is better suited to a person for different reasons. So before you go hunting installment loans in lexingtonlet’s take a look at the types of personal loans.
Explain personal loans
Personal loans are a type of installment loan, which means that you repay them in installments. This loan is given to you without even needing to use the money for anything specific.
Some lenders will allow you to check your offers online without affecting your credit score, but others will not, and when applying you should be aware that you will be required to disclose your personal and financial information and agree that they obtain firm credit. .
This can have a negative impact on your credit score, but only in a very minor and temporary way.
If you qualify, you will receive different offers and be able to repay over different periods, with different interest rates and payment rates.
The interest rates for these loans are usually fixed rate, and they will often remain fixed in monthly installments for the duration of the loan activity. You may also have to pay an administration or origination fee, and you will not get it back.
Should you avoid personal loans?
There are three particular types of personal loans that we recommend you avoid. These are payday loans, title loans and pledge loans.
Payday loans are short term and come with huge fees. They’re not always bad, especially if you’re money wise, but they tend to leave borrowers in a cycle of debt that often ends in taking out new loans to pay off old ones.
Title loans are easy, but you must use your car as collateral. Repayment terms can be short and interest rates high, this can add to the wear and tear on you in the long run, especially if you can’t afford it and find yourself at the end of a repossession.
Pawnbrokers can be a good alternative to payday loans, but you risk losing your items to the pawnbroker and you will often have to pay fees if you want to extend the repayment term.
What are the types of personal loans?
So, knowing all of the above, what are the different types of personal loans you can get?
Here are the main types of personal loans you are likely to come across.
Unsecured loans are loans that are not backed by collateral to protect the lender. Instead, they will usually have a higher cost in their interest rates, which means they may offer you a higher APR.
That being said, you are not putting any of your assets 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 of 6-36%.
Secured loans are the loans that are safe for a lender because you have to post collateral. This could be your house, car or other material possessions. This is often the case with mortgages and car loans.
If you are unable to repay the loan, your house/car may be repossessed.
The majority of personal loans are fixed, which means the rate you pay and the monthly payments you make to repay the loan will remain the same for the life of the loan.
These fixed rate loans are great for keeping your monthly payments consistent on long-term loans.
Co-signed loans are best if you have bad credit and cannot qualify on your own.
Someone else will co-sign the loan, but they won’t have access to your funds. That person will still be in trouble if you don’t make the payments, though.
A person who is a co-signer will generally have great credit.
Variable rate loans are calibrated by banks, and depending on how it goes up and down, 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 this can change over time.
They are not widely available, but 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 of the loans you are currently paying off and consolidate them into one large lump sum.
This is ideal as it reduces the amount you have to pay. How?
Well, if you have multiple loans at different interest rates, it will cost you more in the long run, when you consolidate your loans into a personal debt consolidation loan, you only have one interest rate. interest with which you have to deal.
Personal lines of credit are revolving credits, and they are much like a credit card, more than a personal loan. Instead of getting a lump sum of money, you will have access to a line of credit from which you can borrow as needed.
With this, you will only have to pay interest on the money you borrow
It works best when you need to borrow money for running costs or if you have an emergency.
This article does not necessarily reflect the views of the editors or management of EconoTimes