Get the facts about the different types of personal loans. Then decided which is best for you.
Anyone that’s looking to take out a personal loan wants to save as much money as possible on that loan.
And they want the best type of loan arrangement.
To accomplish both of those objectives (low cost and the right loan type), you just need to know what all your options are and what to expect from each option. You’ll have a more clear picture of what’s available.
From there, you can decide which types of personal loans are best for your unique situation. That’s what we’ll be covering here in this guide.
You’ll see all the loan options available to you and how they might benefit your needs. Or how they could hurt your finances.
If you’re ready to compare and apply for this kind of loan, take a look at our list of the best personal loans online.
Some of the loan types listed below might require collateral.
Most of them won’t.
Let’s start with the most common personal loan…
Unsecured loans are those in which the client does not provide anything as collateral for the money given to him by the lender.
Normally the guarantees are property of a value equivalent to the loan or cars, but if there is nothing as collateral the bank will be taking more risks and therefore the interest and the terms of such loan will be significantly higher.
The usual thing with this type of loan is that the time to repay them varies between one and seven years, and they can have an interest of between 5% and 36%; everything depends on the amount of credit you have requested and the time you choose to pay it back.
Guaranteed personal loans are where the customer offers as collateral one of his goods. For example, in a personal loan to buy a car, the customer puts the car itself as collateral, so if you stop paying off the loan the bank may end up garnishing it as payment of all remaining fees.
The same applies to mortgage loans, where when the client fails to pay more than three instalments without justification, the bank may proceed to seize the property and disable its client.
The best thing about these loans is that their interest rates are lower and there is greater flexibility in the payments; although most of the risk is taken by the client, and so the banks feel more secure in getting to grant more facilities to their clients.
Your typical personal loan has a fixed-rate but you should confirm this with your lender. With this loan, your interest rate stays the same for as long as you’re paying off the loan. The rate doesn’t go up or down.
It stays the same.
As a borrower, these loans provide you with greater security because you know exactly how much you’ll be paying throughout the duration of the loan.
And knowing precisely how much you’ll be paying every month allows you to better manage the rest of your expenses. You don’t have to worry about any fluctuations in payments.
You can plan ahead without any surprises.
These types of loans have a rate that can vary from month to month.
Of course, this means you have no control over how much you’ll pay every month. The payments could be different because the rate you pay can go up or down.
So why would anyone ever consider this type of loan?
Because the rate your lender gives you in the beginning is much lower than a fixed-rate loan. So you could potentially pay a smaller interest rate for a long period of time. Obviously, this would save you money.
But there’s always that risk of your rate going up beyond that of fixed rates. And that could potentially put you in a bind financially.
Most people who choose this type of loan is because they have a short repayment term, in which normally this variability of rates is hardly noticed.
Loans for debt consolidation
If you have accumulated a considerable amount of debt and need to simplify everything into a single payment, then this type of personal loan might be just what you’re looking for.
To make this loan work, the annual rate of the new loan must be lower than the rate of the other debts. Otherwise, no savings would be realized in interest.
It’s a good way to help manage monthly payments. And you don’t have all the excess of fees and outrageously high interest rates.
Co-sign Personal Loans
These types of loans are only valid for people who have never had a bank loan before or who do not have any property in their name.
These co-signature loans are often common between parents and children, as young people have rarely had time to raise the capital needed to apply for a loan, and in turn to provide some sort of guarantee to the bank that they can repay it.
For this reason, it is requested that another person become co-borrower of the loan, agreeing to pay if the first holder were unable to do so.
If the co-debtor is a debt-free person, it will improve the terms of the loan and make the payment rate possibly lower.
Even this much maligned loan is considered a personal loan.
These loans are not in instalments and are not usually large amounts of money; a few hundred dollars or at most a thousand dollars are the usual figures for these quick-application loans.
The borrower must pay the entire loan in full within a single day, usually on the day following the borrower’s payment.
These loans have very high interest rates and make those who request them take a lot of risks.
That’s why it’s important that borrowers of these loans know for sure they’ll be able to pay the loan back on time.
If you’re not able to pay it back on time, you could end up needing an additional loan to pay off that first one.
And that’s when the debt cycle can start and why these loans can really burn the borrower.
Getting one of these loans is a decision borrowers need to take seriously. It’s not a decision that should be made on a whim just because the loan amount doesn’t seem like much at first.
Pawn Shop Personal Loans
This type of loan is more secure than the previous two, as we will borrow from an asset, that is, from something fungible like a jewel or an electric guitar and leave it at the pawn shop.
If we fail to repay the loan, the house will keep the asset and we will not be asked for any surcharge or interest.
The only downside of this loan is that its rates are really high, reaching an APR of over 200%.
Therefore, if we decide to take this alternative, we will first have to carefully weigh all its pros and cons and assess whether there are any other options that will also help us out of the jam.
There are loan types that fit different situations.
A big part of selecting the right loan type comes down to what your needs are and how you want to fulfill those needs.
When taking out any type of personal loan, borrowers should not take the decision lightly… no matter how small the amount applied for is.
Even borrowing small amounts can lead to debt or worse.
With that being said, personal loans serve a purpose and can help borrowers get the money they need, when they need it.
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