Personal loans are the fastest growing type of consumer debt – you may have even considered applying. Personal loans can be an effective way to consolidate debt, pay for unscheduled home repairs, or make a major purchase. But is a personal loan right for you?
What are the 5 types of loans?
Here are the five different types of personal loans to consider:
- Unsecured loans
- Secured loans
- Co-signed loans
- Debt Consolidation Loans
- Personal line of credit
Read this list carefully to determine the best type of personal loan for you.
1. Unsecured loans
An unsecured personal loan is an installment loan that is paid off in monthly increments over time. Since it is not backed by collateral, this type of loan may be easier to acquire if you have good credit.
The loan amounts depend on your credit score. Personal lenders typically offer personal loans between $ 1,000 and $ 50,000 – or up to $ 100,000 to borrowers with excellent credit. The duration of the loans generally varies between one and six years.
Credible can help you find a lender online. Only enter your desired loan amount and your estimated credit score in this free tool to view personal loan interest rates.
The interest rates for personal loans generally vary between 5% and 36%, depending on your credit score. Since the lender is taking a risk with an unsecured loan, he may charge higher interest rates. This type of loan can be a good option for someone with good or excellent credit who wants a regular monthly payment.
2. Secured loans
A the secured loan is an installment loan that is backed by collateral, such as a car, savings account, or other asset. If the borrower defaults on the loan, the lender can seize the asset to cover all or part of the balance.
Secured loans are less risky for personal lenders, and they can offer lower interest rates, making them one of the cheapest personal loans available. Additionally, lenders can be more flexible about their credit score requirements, which means it can be one of the best personal loans for bad credit.
Don’t worry about having to go through personal loan options yourself. Credible can help compare personal lenders to find lower interest rates.
3. Co-signed loans
A co-signed loan is an unsecured or secured loan which has more than one part guaranteeing repayment. If you have bad credit or no credit history, a lender may ask you to have a co-signer, who will assume and repay the loan in the event of a default. For the lender, a consignee is a form of insurance. Having one can improve your chances of getting approved and provide better terms for the loan.
You can find a list of lenders who offer personal loans with co-signers here. After going through this list, visit Credible’s main personal loan center to find out more.
The benefits of taking out this type of loan go to the borrower who can benefit from more money or better terms. It is important to note that the co-signer has drawbacks. The loan will appear on their credit report and missed or late payments can negatively impact their score. Consider this type of loan carefully and understand that the financial risk associated with it can potentially hurt your relationship.
4. Debt Consolidation Loans
A debt consolidation loan combines multiple debts into one loan with a single monthly payment. Borrowers can use it for pay credit cards, medical bills, payday loans and other personal loans. Debt Consolidation Loans can help you lower your overall monthly costs in one affordable payment by avoiding multiple interest rates and late fees.
If you decide that debt consolidation is the right step, it’s important to research the best type of personal loan, the best rates, and the best terms. Fortunately, Credibility makes it easier.
You should also take advantage of a online personal loan calculator to determine costs.
One pitfall that consumers may encounter after obtaining a debt consolidation loan is the temptation to collect balances on credit cards or other forms of personal loans. This personal loan can be a good option if you have the discipline to control your debt and if it offers a lower APR than your existing debt.
5. Personal line of credit
Finally you can eligible for a personal line of credit. This loan is a form of revolving credit, similar to a credit card. Unlike an installment loan which consists of a lump sum repaid in monthly installments, borrowers have access to a line of credit up to a certain amount which can be borrowed according to their needs. Interest is only charged on the unpaid balance.
A personal line of credit can be set up to cover unforeseen expenses for emergency personal loans or income fluctuations. Some lenders may offer a secured asset-backed line of credit. And some allow you to set up a line of credit that is connected to your checking account to cover overdrafts.
You need two things to apply for a line of credit:
- An excellent credit rating
- Good credit history
What is the best type of personal loan to get?
Unfortunately, there is no easy answer to this question. After all, there is no such thing as a single personal loan. So, you really need to take a close look at your financial situation and figure out what you need the personal loan for.
Before you apply, look at the interest rate to determine how much it will cost you. The annual percentage rate (APR) includes the interest as well as the fees charged by the lender expressed as a percentage. According to Federal Reserve, the average personal loan over 24 months has an APR of 9.5%.
Also, determine how long you have to repay the money. Your interest rate will be based on the length of the loan, with shorter terms typically offering lower interest rate. Most loans offer terms ranging from six months to seven years. Your first payment will be due approximately 30 days after signing the papers, so make sure you have enough money in your budget.
Before choosing a personal loan, take the time to explore your options. More than a fifth of respondents to a U.S. News and World Report Survey 2020 said they did not do any research before applying. Use Credible’s free tools to calculate numbers.
Since prices and conditions can vary widely, this can be a costly mistake. Know your options and understand what you are signing. A personal loan should improve your financial situation, not cause damage or put you in danger later.