Types of Personal Loans: A Guide
Posted by Frank Gogol in Loans | Updated on May 29, 2023
Many people want to get personal loans for different reasons – they either want to repair broken appliances, buy themselves something new, or have enough money to buy someone a gift. Personal loans come in different types and if you don’t know much about the financial world, it may be hard trying to decide which one to pick.
Establishing which personal loan type is good for you will depend on several factors such as the amount of time needed to pay back the loan and your credit score. In this article, we will go over the different types of personal loans and what they involve.
Table of Contents
Personal Loans: Overview
Personal loans are great tools that allow you to obtain funds when you need to purchase something or pay some debt but don’t have enough money. For lower sums, a personal loan is more than suitable.
Also, personal loans are extremely useful when you have an emergency and no time to save money. So, if you have the chance to save money, it’s best to avoid taking a personal loan so that you don’t accumulate any more debt. Still, if there is an urgent situation, then you can rest assured that personal loans will help you out. At the same time, you should know that they come with higher limits than credit cards as well as lower interest rates.
You can use certain personal loans for some specific purchases, depending on what you need at that moment. Some of the options you can use personal loans for include:
- Home repairs or improvements
- Purchasing something large like an appliance
- Wedding or vacation payments that you cannot save money for
- Medical treatments or procedures that cannot be covered by insurance money
- Consolidation of different other debts with higher interest, such as student loans or credit cards
Types of Personal Loans
Knowing the types of personal loans offered by financial institutions will help you decide on the right one for your purpose. Here are the different personal loans that you can choose from:
Unsecured Personal Loans
Many people opt for unsecured personal loans because no collateral is required. Collateral is something that you use to back up your loan, so in case you don’t repay the amount, the lender will have the right to take away the collateral and recover the costs. Collateral can be something like your car or your house. The majority of personal loans are unsecured.
This type of loan becomes a riskier option for the lender because they will not have something to take from you in case you run away and never repay the debt. It may end up with you having a much higher annual percentage rate, though, which is the total borrowing cost. It also includes fees like the interest rate and others.
An approval and APR for an unsecured personal loan will depend on the credit score you have. Usually, the rates will go from 5% to 36%. The terms for the repayment can also go from one to seven years based on multiple factors. Also, if you want to get an unsecured personal loan, you will need to have an amazing credit score, between 670 and 739 or better than that.
Don’t think that not having collateral will not bring consequences if you don’t pay off your debt. Not repaying an unsecured personal loan can bring down your credit score. This is especially true if you make late payments. If you don’t make payments at all, the loan account may end up going into collections and ruining your score.
Secured Personal Loans
You can also get a secured personal loan, which has collateral. If you need something that can boost your credit, then a secured personal loan is a great idea.
There are other types of secured loans, respectively car loans that are secured by the car title, and mortgages that are secured by the house. Secured personal loans can be obtained from online lenders or credit unions. The great thing is that they usually have lower rates compared to unsecured loans since they are not as risky for the lender.
Usually, most personal loans are fixed-rate. This means that the interest rate will stay the same over the whole duration of the loan, and the same applies to the monthly payment or installment.
People choose fixed-rate loans because they allow them to know how much they have to pay so they can maintain consistency. They are especially great because you do not have to worry about the rates possibly growing over time. You will be able to establish a monthly budget, so there will be no issues related to debts.
Variable Rates Loans
As you can imagine, variable rates loans will come with interest rates that may change from time to time. It all depends on what benchmark rate the banks set. As the benchmark rate changes, the loan rate will also change, either falling or rising.
Compared to fixed-rate loans, variable-rate ones have lower APRs, and they may also have a cap. This cap puts a limit on how much the rate can shift during a certain time. It is best to get a loan like this when you are looking for something with a short repayment term.
Debt Consolidation Loans
These types of personal loans are used by people who have multiple debts. It can be very hard to manage so many different debts at once, so people are looking for debt consolidation in order to combine them into a single loan.
Debt consolidation loans come with a much lower APR compared to the rates on the debts you already have. This way, you will end up saving a lot on interest.
Not to mention that you will always be able to make payments in a much easier way since you will have one larger debt instead of several smaller ones.
Co-signed loans were made for individuals who have no credit history, in which case it would be difficult for them to be eligible for a loan by themselves.
A co-signer will allow the person to get the loan and will also promise to repay the amount in case the borrower fails or just does not want to do it. It can also be safer for the lender as it is a type of insurance.
Personal Lines of Credit
A personal loan of credit is something that offers you access to money that you can borrow whenever you need it. It is revolving credit, and after borrowing the money, you will pay interest only on the amount you took. If you only need the money to pay for emergencies or some ongoing expenses, this type of loan is one of the best choices.
- Guide to Getting Second Personal Loans
- How to Borrow Money for a Downpayment
- Principal Vs. Interest: What’s the Difference?
- What is Conditional Loan Approval?
- What is a Credit Reference?
- Everything You Should Know About Loan Pre-Approval Without Hard Inquiry
The Bottom Line
Knowing the different types of personal loans will help you select the right one based on your needs. Go through every loan type mentioned above, analyze the pros and cons and decide which one can help you deal with your expenses.