Personal loans have emerged as the most rapidly expanding category of consumer debt, and you might have contemplated applying for one yourself. These loans can prove to be a valuable resource for debt consolidation, unexpected home repairs, or significant purchases. However, the critical question is, is a personal loan the right choice for your particular circumstances? The decision hinges on various factors, including the type of personal loan and its associated terms aligning with your needs. Thus, before committing to any financial agreements, it is essential to carefully assess whether a personal loan suits your financial objectives.
What are the 5 types of personal loans?
The following five distinct types of personal loans are worth considering:
- Unsecured loans
- Secured loans
- Cosigned loans
- Debt consolidation loans
- Personal line of credit
It is advisable to thoroughly review this list to identify the most suitable type of personal loan for your specific needs.
1.Unsecured Loans
An unsecured personal loan is an installment loan repaid in monthly increments over time. As it lacks collateral backing, this type of loan may be more accessible to individuals with good credit.
The loan amount you can secure depends on your credit score. Generally, personal loan lenders offer loans ranging from $1,000 to $50,000, and in some cases up to $100,000 for borrowers with excellent credit. Loan durations typically span from one to six years.
Credible can assist you in finding an online lender. By simply entering your desired loan amount and estimated credit score into this free tool, you can access personal loan interest rates.
Personal loan interest rates typically fall between 5 percent and 36 percent, varying according to your credit score. Given the risk associated with unsecured loans, lenders may impose higher interest rates. This loan type is a favorable choice for individuals with good or excellent credit seeking a regular monthly payment.
2.Secured Loans
A secured loan is an installment loan supported by collateral, which could include a vehicle, a savings account, or another valuable asset. In the event of a borrower’s default, the lender has the right to take possession of the collateral to cover part or all of the outstanding balance.
Secured loans present lower risk to personal loan lenders, often resulting in more favorable interest rates. This makes them among the most cost-effective personal loans available. Furthermore, lenders might exhibit greater flexibility when it comes to credit score requirements, rendering secured loans a viable choice, even for those with poor credit.
If you’re concerned about navigating personal loan options on your own, rest assured that Credible can assist you in comparing personal loan lenders to secure lower interest rates.
3.Cosigned Loans
A cosigned loan encompasses both unsecured and secured loan types, involving more than one party to guarantee repayment. In cases where your credit history is unfavorable or non-existent, a lender might request a cosigner. The cosigner is responsible for repaying the loan in case of default, serving as a form of security for the lender. This arrangement can enhance your approval prospects and yield more favorable loan terms.
To locate lenders offering personal loans with cosigners, a comprehensive list can be found here. After perusing this list, visit Credible’s primary personal loan hub to access further information.
While the benefits of this loan type favor the borrower, as it enables access to larger loan amounts and improved terms, it is vital to acknowledge the cons experienced by the cosigner. The loan will be reflected on their credit report, and any missed or late payments could detrimentally affect their credit score. When considering this type of loan, it is crucial to grasp the financial risks and the potential impact on your relationship with the cosigner.
4.Debt Consolidation Loans
A debt consolidation loan is designed to merge multiple debts into a unified loan with a single monthly payment. This type of loan is suitable for paying off various financial obligations, including credit cards, medical bills, payday loans, and other personal loans. By consolidating debts, borrowers can simplify their financial obligations, avoid multiple interest rates and late fees, and ultimately lower their overall monthly expenses.
Should you opt for debt consolidation, it is crucial to diligently explore the most appropriate personal loan type, interest rates, and terms. Thankfully, Credible simplifies this process for you. Additionally, you can leverage an online personal loan calculator to accurately assess associated costs.
A potential pitfall that individuals should be cautious of following a debt consolidation loan is the temptation to accumulate new balances on credit cards or other types of personal loans. While this personal loan can be an effective choice, it is contingent on your ability to manage debt wisely and secure a lower Annual Percentage Rate (APR) compared to your existing debts.
5.Personal Line of Credit
Another option to consider is a personal line of credit. This type of loan functions as a revolving form of credit, similar to a credit card. Unlike an installment loan that entails a lump sum payment repaid in monthly installments, a personal line of credit grants borrowers access to a predefined credit limit that can be utilized as needed. Interest is only accrued on the outstanding balance.
A personal line of credit can serve as a safety net for unforeseen expenses, emergency personal loans, or income fluctuations. Certain lenders may provide a secured line of credit, collateralized by an asset. Alternatively, some may offer a line of credit linked to your checking account, designed to address overdrafts.
To be eligible for a line of credit, you typically require two key qualifications:
- An excellent credit score
- A solid credit history
What is the Optimal Type of Personal Loan to Pursue?
Regrettably, there is no simple response to this inquiry. A universal personal loan that suits everyone’s needs does not exist. Therefore, a careful assessment of your financial circumstances is essential to determine the most suitable personal loan for your requirements.
Prior to submitting your application, scrutinize the interest rate to assess the associated costs. The annual percentage rate (APR) encompasses both the interest and any fees imposed by the lender, presented as a percentage. On average, a 24-month personal loan, as stated by the Federal Reserve, boasts an APR of 9.5 percent.
Furthermore, consider the duration you have to repay the borrowed sum. The interest rate is influenced by the loan’s duration, with shorter terms typically featuring more favorable interest rates. Loan terms typically span from six months to seven years, and the initial payment will become due approximately 30 days following the signing of the agreement. It is imperative to ensure that your budget accommodates this schedule.
Prior to selecting a personal loan, allocate ample time to explore the available options. Shockingly, over 20 percent of respondents to a 2020 U.S. News & World Report survey admitted to not conducting any research before submitting their applications. Utilize the free tools provided by Credible to perform a thorough financial analysis.
Given the substantial disparities in rates and terms, neglecting to do so can result in a costly oversight. Familiarize yourself with the various possibilities and gain a comprehensive understanding of the loan agreement. The objective of a personal loan is to enhance your financial situation, not to jeopardize it or expose you to future risks.