Do you need to take out a personal loan, but aren’t sure which to choose? Check out this guide to learn about the different types of personal loans.
There are many reasons why someone needs a personal loan. Debt consolidation and financial emergency are two common reasons why. Depending on your situation there are different types of personal loans for you to consider.
Your credit score will play a big role in what loans you qualify to receive. It will also impact the terms and conditions of the loan. Bad credit no longer affects borrowers the way it has in the past.
Before completing a loan application it is a good idea to check with the three major credit reporting agencies. Once you have a clear picture of your financial situation look for loans that are most likely to be approved.
Understand that with each option you will have pros and cons. Only borrow what you need and make your payments on time.
Keep reading for your guide to different loans that are available to qualified borrowers.
What Are Personal Loans?
A personal loan is an agreement between a borrower and a lender with specified repayment terms. Repayment is typically in installments scheduled over a predetermined time period.
All loans have interest and fees attached to them. This is how the lender profits from lending borrowers money.
Personal loans provide borrowers with access to immediate cash. Amounts are upwards of $50,000. However, most borrowers do not request this amount.
Once you have been approved for a loan repaying the money according to the terms is important for future loans. Some lenders place more emphasis on past experience than credit scores.
A short-term loan is a loan that can range from $500 up to $15,000. They are called short-term because they have to be repaid pretty quickly. The repayment terms are usually a year or less.
Short-term loans also fall under the category of being unsecured. Therefore, no collateral is needed. It is not uncommon for this type of small personal loans to have high-interest rates.
Many conventional and unconventional lenders offer them so shop around.
Long-term loans are the opposite of short-term loans. These loans can be financed with a longer repayment plan. The terms give the borrower five or more years to repay the loan.
Like short-term loans, you probably won’t need collateral but will pay a higher interest rate.
When you are in need of cash it is easy to look at a personal loan with longer repayment terms. Keep in mind, the longer it takes you to pay the loan back the more the loan ends up costing you.
These loans should be to address an immediate need. It is not recommended to take out a loan to pay for a vacation or to buy a used car.
Credit Cards Are Types of Personal Loans
You may be asking if credit cards are a form of personal loan. In essence, they are. You are borrowing money to pay for something that couldn’t be paid for with cash.
Credit cards often come with the option to take out cash advances. The amount is based on a predetermined amount set by the credit card company. In most cases, a cash advance can equal the unused credit limit on the card.
Some people keep a credit card for the sole purpose of having available cash when a need arises. On one hand, this is a good idea in case of an emergency. The only problem is credit card interest rates are usually higher than on a personal loan.
There are also other fees associated with cash advances.
A growing trend in the financial industry is no credit check loans. These are loans that consumers can access without going through a bank.
The institutions offering the loans are based online and use their own metrics for approval. If you can provide tax records and proof of income, chances are you will be approved.
This is great news for someone with less than perfect credit and no relationship with a traditional bank.
Payday loans are small loans consumers can access based on their employers pay dates. All you need is proof of employment. Your loan amount is based on your annual revenue.
A typical payday loan is around $500 and can go as high as $1500 in some states.
Be careful using these types of personal loans. They must be repaid in two to three weeks, based on your pay schedule. The interest rates are high and continue to climb the longer it takes to repay the loan.
To obtain a payday loan you must have a bank account that lender can debit via an electronic fund transfer.
Line of Credit
A line of credit loan is a loan where the consumer is approved for a set amount but not obligated to take the full amount. Instead, you take what you need when you need it.
Say you are approved for $10,000 but only need $5,000. You withdraw $5,000 and your repayment is based on that amount. If a few months later you need the remaining $5,000 you contact the lender for a disbursement.
A line of credit is a good option for an unsecured loan. Unlike a credit card cash advance, the interest rates are much lower.
A collateral loan is a personal loan that is secured by an item if equal or greater value. For example, an auto finance or home loan are both collateral loans. When the borrower fails to repay the money the lender can take possession of the collateral.
Collateral loans are not common when it comes to types of personal loans. Lenders do not want your property they want their money repaid with interest.
If you go this route make sure the collateral is not a cherished family heirloom.
Do You Need a Personal Loan?
Now that you have a guide to types of personal loans, have you decided which one is best for? Applying for a loan is quick and easy. Don’t delay, get the money that you need now.
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