If you need cash, taking out a personal loan might be the answer. This type of loan can fund you with hundreds or thousands of dollars. Moreover, you are usually given one to five years (or even more) to pay back the loan in full.
Personal loans usually don’t have any restrictions on how you will use the money. That is why they are known to be the funding option you can go to for almost any purpose. Furthermore, a personal loan can be the best option when it comes to your unexpected expenses.
Types of personal loans
The following are the types of personal loans you should know about:
Secured personal loans
Under secured personal loans, lenders will require you to put up a valuable item to secure the personal loan you are trying to get. It can either be your savings account, house, or car. Furthermore, if you fail to pay back the loan, the lender has the right to take away what you pledged as collateral.
Secured personal loans usually come with lower interest rates because of the collateral requirement. However, this is not true when it comes to car title loans and payday loans. These types of loans typically offer higher interest rates and fees.
- Lower interest rates
- Higher loan amounts
Unsecured personal loans
Unsecured personal loans don’t require you to pledge collateral for you to get approved. Instead, lenders will look into your creditworthiness. They use this in evaluating your application, which includes your ability to pay, the interest rate, and the loan amount you can qualify.
Borrowers with good credit scores usually get lower interest rates and favourable terms than those with bad credit scores. Hence, it is vital to work on your credit if you currently have a bad credit score.
- No collateral needed
- Predictable payments and interest rates
- Favourable terms and interest rates for people with good credit
- Loan amounts might be limited
- Unfavourable terms and interest rates for people with bad credit
Fixed-rate personal loans
Personal loans usually have fixed rates. This means the interest rates under fixed-rate personal loans will remain the same from the start to the end of the loan term. Because the payment amount remains the same throughout the term of the loan, repayment is simpler to manage.
- Predictable monthly payments
- Protection from rising interest rates
- You will know the total loan costs upfront
- Rates won’t automatically drop if interest rates go down
- Higher starting interest rates and monthly payments compared to variable-rate personal loans
Variable-rate personal loans
Variable-rate personal loans are less common. However, some lenders offer this type of loan. Under a variable-rate personal loan, your interest rate will be subject to change over time based on a financial index.
- Starting rate and monthly payments is lower than fixed-rate personal loans
- Interest rates have the possibility of going down
- Interest rates could go up
- You may get stuck with the loan
- Unpredictable payments
Examples of personal loans and their uses
The following are examples of personal loans people usually get for a variety of purposes:
Credit builder loans
Credit builder loans help you with rebuilding and building credit. This is an excellent option for those who are struggling with having bad credit. Furthermore, they are also good with those who are still starting to build credit.
This type of loan can either be secured or unsecured, depending on the lender. Making on-time payments in this type of loan can improve your credit score. Most of the time, credit builder loans only offer small amounts that can be repaid over a few months.
Vacation loans are mostly unsecured. You can use this type of loan for your travel expenses. However, the drawback would be repaying the loan for several months or years. This means your vacation memories might fade away, but you still have to repay the loan.
An alternative for this type of loan would be to plan and save up money. You can prepare the amount you need earlier than your planned vacation. That way, you won’t end up paying interest from taking out a loan.
Wedding loans are typically unsecured. They are designed for a particular purpose. Since weddings can be expensive at times, this type of loan can help you make ends meet.
This is excellent if you have a good credit score. That way, you will get favourable terms and interest rates. Moreover, you can lessen the loan amount you want to borrow by changing your wedding plans or saving up money.
Debt consolidation loans
If you have many debts, you can use debt consolidation loans to manage it easier. Most of the time, this type of loan is unsecured. Furthermore, if you pay a lesser interest rate using this loan, you can get out of your debts a little faster than usual and save money. You can also use this loan to pay off your credit cards, which leads to an improvement in your credit utilization ratio.
It pays to know the different types of personal loans. That way, you will know what to expect in borrowing money. Furthermore, it is vital to note that you should only borrow funds you can afford to avoid any financial problems in the long run.