When used wisely and handled responsibly, loans can be a great asset to your personal finance situation. Learn about the types of personal loans here.
In 2018, over 80 million Americans took personal loans of some sort, as financial assistance. A large portion of these loans were taken out for vehicles, bills, emergencies and tuition aid for students.
The truth is, most people do wind up taking loans at some point during their lives. Life is unpredictable, bills need to be paid and sometimes you need a bit of monetary assistance.
So in the event that you find yourself in a situation like this, let’s look into what your options are and the types of personal loans you can choose from.
- Security: Secured & Unsecured Personal Loans
There are two kinds of personal loans that are based on security. In this context, security refers to “collateral“. Collateral is something that you back up your repayment against and can be claimed by the lender in case you fail to repay the loan.
Secured loans are those that are backed up with collateral and unsecured loans are those that do not have collateral against them. Given that secured loans are less risky for lenders, they usually have lower rates of interest than unsecured loans.
- Payday Loans
Payday loans are a very specific kind of unsecured loan. These are short term loans that are payable on the borrower’s next payday. Online payday loans are ideal for someone who finds themselves in need of financial assistance between pay-cheques.
The terms are usually straightforward, the loans are short-term and poor credit scores usually don’t affect your chances of getting one.
- Rate of Interest: Fixed & Variable Loans
Loans can further be distinguished based on the kind of interest they offer to the borrower. Fixed-rate loans have a consistent rate of interest throughout the term of the loan. Variable loans are based on a fluctuating rate of interest that is determined by specified factors, like the market rate of interest.
The former is generally considered safer for long term loans, and the latter for short term loans.
- Debt Consolidation Loans
Debt consolidation loans are taken to pay off other debts, liabilities, and loans. It implies pooling together your debts into a single one that requires regular installments to pay it off.
- Co-signed Loans
Sometimes you may not have a good enough credit score or valuable collateral to get a low-interest loan for yourself. In such a situation, you can ask someone else to vouch for you or “co-sign” the loan as a promise to repay it in case you cannot.
If the co-signer has a good credit score it can get you more favorable terms and interests on the loan, making payment easier as well.
Types of Personal Loans: Which One Should You Get?
In order to choose the right kind of loan for yourself, you need to know the kind of interest you can expect. Most rates of interest are determined on factors like your credit scores, the co-signers backing you up or the collateral you can offer.
In some cases, a personal line of credit might be more favorable. Understand what you need and what you can afford, and you will be able to choose the right types of personal loans for yourself.
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