Although loans are not necessarily harder to get, the fact that there are now more types than ever can be confusing. Both banks, as well as online platforms, are increasing their services portfolio in order to offer as much flexibility as their customers need. Unfortunately, this business move also makes it more difficult to make an informed decision. In this article, we will take a look at what are the main types of personal loans that you can take out, and explain how they work so that you can determine which one suits you best.
Here are the types of personal loans that you can access:
- Unsecured personal loans
This is one of the most common types of personal loans encountered, mainly due to the fact that they are not backed by collateral. While this does take the risk away from the client and puts it on the shoulders of the lenders, it does come with higher annual percentage rates, making it slightly more expensive in the long run.
It is also important to keep in mind that in order to be eligible for an unsecured personal loan you have to have a good credit score. The rates that you get for the loan are also dependent on the score and can be as high as 36%.
- Secured personal loans
Secured loans have lower rates, however, they need to be backed by collateral such as your vehicle or home. Both mortgages and car loans are part of this category of financing.
While secured loans do need to be backed up by your property, which the lenders can seize if you cannot repay the money, it does have lower rates, making them the better option if you have a stable source of income.
- Fixed-rate loans
When it comes to all types of personal loans, most banks offer fixed rates. This means that your rate and installments will not change from one month to another. These are usually the most useful when the economy is expected to go through dramatic changes and you want to ensure that you will have to make consistent payments each month.
- Variable-rate loans
Here, interest rates depend on specific benchmarks set by each bank. The amount of interest that you will have to pay on a monthly basis will depend on how that benchmark changes. These usually carry lower APRs than other types of loans and can even work to your advantage if you are able to predict how the economy will change.
- Debt consolidation loans
Debt consolidation loans are only useful if you have multiple loans and do not want to pay each of them separately. Some banks offer these in order to simplify the debt payment process and also to help clients save on interest. This having been said, for a debt consolidation loan to be truly useful, it must have a lower APR than the rates on the existing debts.
- Co-sign loans
A co-sign loan is a loan in which another person agrees to repay the money if the borrower is unable to. These are usually used by individuals who have low credit scores or no credit history at all. They can have fixer or variable rates and the eligibility conditions differ from one bank to another.
As a word of advice, getting a co-signer who has a strong credit score can help lower the rates of the loan.
- A personal line of credit
Personal lines of credit are identical to the commercial ones. You open an account that contains a set amount of money. Depending on how much of that money you use on a monthly basis, without repaying it by the end of the month, you will have to pay interest. In other words, you only pay for what you borrow, regardless of how much money is put at your disposal.
- Online lending services
These are hundreds of online platforms that allow individuals to borrow money for varying amounts of time. The main advantage with these is the fact that the evaluation process is streamlined and in some cases, you may be able to get the money in under 24 hours. Furthermore, these services rarely perform credit score checks.
However, most services will place limits on how much money you can borrow and for how long, which means that they are useful only in particular scenarios where you do not need a big loan.
These are the main types of loans that you can get from banks or online services. Please keep in mind that while these are somewhat standardized, every bank and online platform will have different terms and conditions. In some cases, you may be able to get lower rates or get some types of loans even if you have bad credit.