Personal loans help you to achieve your financial goals when you don’t have money in some situations. You can get a personal loan if you qualify for it. The lender assesses your income and credit score before lending you money.
Personal loans are of different types, and you should know which is the best option for you based on your financial situation. This guide will help you to learn about them and choose the right one that is suitable for you.
Types Of Personal Loans
There are different types of personal loans available. If you want to take a personal loan, learn about them before you apply.
Most of the personal loans are usually unsecured. These loans don’t require any collateral such as cars, bonds, or any assets as security for the loan. So, this type of personal loan is riskier for lenders. Due to this, the interest rates of these loans are a little higher than secured loans.
The lender approves a loan based on your credit score. There are various types of credit calculators, and they use different methods. Typically, unsecured loans charge from 5% to 36% interest rate with repayment time ranging from one to seven years.
Unlike unsecured loans, you need to deposit collateral to get a secured personal loan. The lender can seize the collateral if you default on the loan. For example, if you keep your car or house as collateral for a personal loan, the lender may seize it if you don’t repay the loan.
You can get secured personal loans from banks, online lenders, and credit unions against your assets or property. Interest rates are usually less than unsecured personal loans because these loans are considered less risky for lenders.
Overdraft Personal Loans
Overdraft personal loans help you in emergency situations. Banks offer you a limit to overdraw from your account. However, you don’t have to pay interest for the maximum amount you can withdraw, but you will pay interest for the amount you borrow.
Overdraft personal loans are a great option when you need money instantly. Although you can get money quickly, these loans typically charge higher interest rates than other types of personal loans. Learn how overdraft facilities work.
Debt Consolidation Loans
Do you have multiple loans? Then you can roll all your loans into a single loan with the debt consolidation option. The best part of this type of loan is the interest rate may reduce than the existing rate.
Additionally, you will also become relaxed as you don’t have to worry about multiple loans and to pay them on time. In a nutshell, debt consolidation combines all your debts into a single debt with a fixed monthly payment. So, it simplifies managing your debt repayment option.
Payday loans come under unsecured loans, but you have to repay them on the next payday instead of installments. Payday loans usually tend to be lesser in amount and also for a short period.
You have to pay high-interest rates when you borrow payday loans. Some borrowers fall into a debt cycle because they take out additional loans to repay their payday. It leads them to a cycle of debt. So, it’s better to avoid these types of loans if you have other alternatives.
Credit Card Cash Advance
Another way to avail of personal loans is through credit cards. If you need instant cash, you can withdraw money from an ATM or bank using your credit card.
However, credit card cash advance loans are expensive. Since the interest rate is high, plus you have to pay an additional amount as cash advance fees. So, it’s better to avoid taking cash from credit cards if you can arrange an alternative.
Interest Rates Of Personal Loans
Now that you know about different types of personal loans let’s talk about the types of interest rates. There are mainly two ways that lenders charge interest rates;
- fixed interest rate.
- variable interest rate.
In the end, it all comes down to your personal preference. However, take a look at the pros and cons to make an informed decision.
Fixed Interest Rate
Fixed interest rate personal loans are easier to manage because they have fixed rates over the life of the loan. Here are the benefits and drawbacks of fixed interest rate personal loans:
- You don’t need to worry about the rise in interest rates because of fixed interest rates.
- Budgeting is easier as the repayment remains equal throughout the term.
- Usually, fixed interest rates personal loans have higher interest rates than variable interest rate personal loans.
- When the interest rate changes, your repayment value may rise.
Variable Interest Rate
As the name suggests, the interest rates can change anytime during the term of the personal loan. Since the interest rate changes, your repayments also go up and down. Here are the pros and cons of variable interest rate personal loans.
- The interest rates and fees are normally lesser than fixed interest personal loans.
- The repayment can decrease in value if the itinerant rate falls.
- It may be difficult to budget because of fluctuation in interest rates.
- The repayment value may go up when the interest rate rises.
Things To Consider Before Choosing A Personal Loan
Now that you know about different types of personal loans consider the following factors before taking a personal loan.
- Assess your finances and evaluate your ability to repay the loans.
- Try to maximize your credit score and history.
- Compare different lenders.
- Consider all the fees, charges, costs involved in your loan.
- Avoid falling into a gimmick.
The Bottom Line
I hope the above information has helped you to understand personal loans and their types. If you want to take a personal loan, calculate your credit score and income before you apply for a loan.
You can read my other articles to know how to avail a personal loan and which is the best option for you. If you are struggling to manage your money and budgeting, learn about personal finance.