No one wants to be in a position where they have to rely on a loan to help them financially, but we all have to accept that we may eventually end up in that position.
Personal loans are one of the most common types of loans that people end up taking at some point in their lives, and the reason for this is that personal loans do not have a specific purpose.
While mortgages, car loans, student loans, etc. have very specific purposes, personal loans can be for just about anything… Almost.
But there are also many types of personal loans you can get, and each type is best suited to a person for different reasons. So before you go hunting installment loans in lexingtonLet’s take a look at the types of personal loans.
Explaining personal loans
Personal loans are a type of installment loan, which means you pay them in installments. This loan is granted without the need to use the money for anything specific.
Some lenders will let you check their offers online without it affecting your credit score, but others won’t, and when you apply, keep in mind that you’ll need to disclose your personal and financial information and agree to get hard credit. . .
This can have a negative impact on your credit score, but only minimally and temporarily.
If you qualify, you’ll get different offers and be able to pay in various periods, with different interest rates and payment rates.
The interest rates for these loans are generally fixed and will often remain fixed in monthly payments for the duration of the loan activity. You may also have to pay an administration or origination fee, and you won’t get it back.
Should you avoid any personal loan?
There are three particular types of personal loans that we recommend staying away from. These are payday loans, title loans, and pawn shop loans.
Payday loans are short term and come with giant fees. They’re not always bad, especially if you’re wise with your money, but they do tend to leave borrowers in a cycle of debt that often ends in new loans to pay off old ones.
Title loans are easy, but you must use your car as collateral. Payment terms can be short and interest rates high, which can leave you worse off in the long run, especially if you can’t afford it and end up on the receiving end of a repossession.
Pawn loans can be a good alternative to payday loans, but you risk losing your items to the lender, and you’ll often have to pay a fee if you want to extend your payment term.
Â¿Which are the types of personal lending?
So, knowing all of the above, what are the different types of personal loans that you can get?
These are the main types of personal loans you are likely to come across.
Unsecured loans are loans that are not backed by collateral to protect the lender. Instead, they will generally cost more in their interest rates, which means they can get you a higher APR.
That said, you’re not putting any of your possessions at risk by taking out an unsecured loan.
You’ll still be evaluated on your credit score, income, and debt, and could get a rate of 6-36%.
Secured loans are loans that are safe for a lender as they have to post collateral. This could be your house, car, or other worldly possessions. This is often the case with mortgages and car loans.
However, if you do not repay the loan, your home/car may be repossessed.
Fixed interest rate
Most personal loans are fixed, which means that the rate at which you pay and the monthly installments you make to repay the loan will remain the same for the life of the loan.
These fixed rate loans are great for consistency in your monthly loan payments over the long term.
Cosigned loans are best if you have a bad credit score and can’t qualify on your own.
Someone else will co-sign the loan, but will not have access to your funds. However, this person will continue to have problems if he does not make the payments.
A person who is a co-signer will generally have great credit.
Banks look at variable rate loans, and depending on how it goes up or down, your loan will do the same. You’ll usually get a lower APR for this, and there will often be a cap on how much you can change over time.
They are not widely available, but are generally found in shorter-term loans.
Debt consolidation personal loans are actually a popular type of personal loan. This type of personal loan will take all the loans you are currently paying and roll them into one large lump sum.
This is ideal as it reduces how much you have to pay. How?
Well, if you have multiple loans at different interest rates, this will cost you more in the long run, when you consolidate your loans into a personal debt consolidation loan, you only have one interest rate to deal with.
Personal lines of credit are revolving credit and are much like a credit card, rather than a personal loan. Instead of getting a lump sum of money, you’ll gain access to a line of credit that you can borrow from when you need to.
With this you will only have to pay interest on the money they lend you
It works best when you need to borrow money to pay ongoing fees or if you have an emergency.
This article does not necessarily reflect the views of EconoTimes editors or management.