Types Of Personal Loans

You might have to take on debt to make ends meet if you incur unforeseen costs or need to make purchases larger than what you have saved. A credit card or line of credit is an example of revolving credit that you can choose if you require flexibility.

However, it might make more sense to take out a personal loan—an installment loan that is paid back over a predetermined term or period—if you need a specific amount of money on an as-needed basis. You make monthly payments until the loan balance is paid off.

Large banks that offer personal loans typically have strict credit score requirements and turn away clients who don't have a credit score of at least 670. However, this does not imply that personal loans are hard to come by; a growing number of online lenders and credit unions provide various personal loan options.

Common Uses for a Personal Loan

While avoiding debt and using savings for large purchases is always preferable, there are situations when it isn't an option. Use caution when taking out personal loans, especially if you can afford the payment by saving and waiting. However, personal loans are frequently a good choice if financing is required because they frequently have greater limits and lower interest rates than credit cards.

Certain loans, such as a mortgage to buy a home or an auto loan to buy a car, must be used for specific purchases. However, there are numerous uses for personal loans, including:

• Consolidation of higher-interest debt, like credit cards or student loans

• Medical procedures that aren’t covered by insurance, such as fertility treatments or cosmetic surgery

• Vacations or weddings that you’d rather not wait to save up for

• Home improvements or repairs

• Large purchases such as a home appliance

Types of Personal Loans

While unsecured, fixed-rate loans are the most popular kind of personal loans, there are other options available from certain lenders that you should consider while you compare rates.

Unsecured Personal Loans

Most personal loans are unsecured, meaning no collateral is needed to secure the loan. Your car is collateral for auto loans, so the lender may take it back if you cannot make your payments.

However, since any physical asset does not secure an unsecured personal loan, the lender cannot seize your property if you cannot make payments. The loan is secured by your excellent credit history and possibly the credit of a co-signer. According to credit agency Experian, if you're looking for an unsecured personal loan, you should normally have a good credit score—670 to 739—or higher.

However, there are drawbacks if you cannot repay your unsecured personal loan. Your credit may suffer if you pay late or not at all. If you don't make your payments, your personal loan account may go into collections, further damaging your credit.

Unsecured personal loans are generally only available to borrowers with excellent credit because they don't require collateral, making them riskier for the lender.

Safe Personal Loans

You might still be able to get approved for a personal loan even if your credit could use some work; however, the lender might insist that the loan be secured. This implies that you will need to offer an asset, like a car, savings account, or certificate of deposit, as security for the loan.

The good news is that secured personal loans typically have lower interest rates than unsecured loans. This is because the lender bears less risk. After all, they have the option to seize your collateral if you are unable to pay.

Rates Fixed for Personal Loans

Most personal loans are fixed-rate, meaning the interest rate and the monthly payment stay the same throughout the loan's term. The advantage is that you'll be able to manage your budget better because you'll know precisely how much your monthly installment will be. Additionally, you can anticipate how much interest you will pay throughout the loan's term. Before you apply, you can estimate your monthly payments with the aid of a personal loan calculator.

Adjustable-Rate Personal Loans

Although they are less common than fixed-rate personal loans, certain lenders still provide adjustable-rate loans. Your interest rate is subject to fluctuate over time rather than remaining constant.

The initial low-interest rate of adjustable-rate loans, also known as variable- or float-rate loans, is one of their main selling points. The monthly payment may increase or decrease after a predetermined period based on changes in the market and the interest rate.

Although interest rates are typically capped to keep you from paying over a certain amount, there is a chance that you will be stuck with a higher rate and erratic monthly payments. Because of this, taking out an adjustable-rate personal loan is typically not advised unless you can repay the loan quickly.

Personal Loan Alternatives

Personal loans are great for some expenses, but before you choose the best financing option for you, you might want to think about these other options:

Savings. This isn't always feasible if you require a loan to cover an urgent cost, like an unplanned home repair or an urgent medical appointment. But if it's something you can wait on, putting money aside and paying cash makes more sense. This saves you money by preventing interest payments and debt, both of which can harm your credit and general financial situation.

Credit cards. Credit cards are often the best option for making smaller, continuous purchases than personal loans, which are best for one-time, large purchases. This is partially because credit cards often have higher interest rates than personal loans and have smaller maximum borrowing amounts. They are a type of revolving credit, meaning you get access to a credit line for as long as needed. Once you pay off your debt, you can borrow money again up to the credit limit. You only pay interest on the amounts that you use. Credit cards only require a minimum payment each month instead of fixed monthly repayment schedules. This offers greater flexibility than personal loans, but because there is no predetermined term or repayment schedule, it is simpler to get into debt.

Lines of credit. A line of credit is another form of revolving credit, where you have a credit limit and only pay interest on what you borrow. Like a credit card, you have a minimum amount of money you must return each month and can borrow more. One choice is a personal line of credit; it functions similarly to an unsecured loan. A home equity line of credit is another choice that leverages your house as collateral. But, lines of credit function more like loans because they give you access to a cash reserve instead of requiring you to pay with credit cards. If you have a line of credit, you typically use a check to access the funds or request a bank account transfer from the lender.

Payday loans. Payday loans are a popular option for consumers with bad credit who can't get approved for personal loans because the loan amounts are small and the lending standards are loose. However, the Consumer Financial Protection Bureau claims that payday loans are a predatory form of lending since the fees are exorbitant and mount up quickly, trapping many borrowers in debt. Steer clear of these at all costs.

Many different kinds of personal loans and other financing options are available if you need to pay for a significant life expense. Just remember to do your homework, evaluate quotes from several lenders, and understand the potential effects a loan may have on your credit, both good and bad.