Types of Personal Loans

Types of personal loans

There are many types of personal loans that lenders provide. The type of personal loan you need usually depends on many factors including the time you need to repay the debt, your credit score and other credit worthiness factors. Lenders look at many factors in determining whether to underwrite a loan. We have put together a short list of some of the more common types of personal loans that you may be interested in.

Secured Personal Loans

Simply put, secured loans are backed by collateral. This collateral or real property can be a vehicle or house. Lenders are more likely to give secured loans because they have more confidence that they will get paid back. Secured loans give lenders certain legal rights to take possession of the collateral should you default on your payments. Generally, secured loan rates typically have lower interest rates than unsecured loans because they are less risky to lenders because there is collateral behind the loans.

Unsecured Personal Loans

Unsecured personal loans aren’t backed by collateral and are considered by most lenders to be higher risk loans. Because these are viewed as higher risk they come with a higher interest rate. The Annual Percentage Rate (APR) that is associated with an unsecured personal loan is generally due to the lack of secured collateral backing the loan. Some borrowers are able to obtain personal loan from a bank or credit union which typically have the best rates because they have the highest underwriting standards. You can expect to pay a higher APR based on the more flexible or lenient underwriting standards that the lender uses.

Joint Personal Loans

Joint personal loans or co-signed loans are a good choice for new borrowers or individuals with limited or no credit history. They are also a good choice for borrowers who have a poor credit history and who on their own would get a much higher APR loan or. In many cases co-signed loans are popular among borrowers who might not have a sufficient credit profile to qualify for a loan on their own. Lenders see less of a risk if there is a co-signer with a strong credit profile who basically guarantees that the lender will get paid. Co-signers may also help in securing a loan with lower interest rates with more attractive loan terms.

Debt Consolidation Loans

Debt consolidation is a process that looks at all of the debt of a borrower has with multiple creditors and combining several or usually all of them into one new loan. That new loan which will be large will hopefully offers a lower APR than what the borrower was paying with the old debt and the convenience of paying one bill. Paying one bill is important in this case because if the borrower is late, they only pay one set of fees, while if they had multiple creditors they would be paying multiple sets of fees. Additionally, a single loan might come with more flexibility and a longer term which should help the borrower better manage their budget and hopefully keep future debt under control. The goal with a debt consolidation loan is to save money on interest while enjoying a fixed monthly installment which is less than the sum of all the monthly payments the borrower was paying. It may have a longer term so the monthly payments will be affordable but it should simplify a borrowers life by simply having only one loan to pay rather than many.

Fixed Rate Loans

Fixed rate loans are loans where the interest rate is set for the term of the loan. The cost of loan is set in a schedule and will not fluctuate with changes in the capital markets. This generally allows for standardized monthly payments and for the borrower to know the total cost of the financing ahead of time. Fixed rate loans are often the right choice for consumers with tight finances but who are able to budget as there is stability in their financial situation. They protect against rising interest rates that could increase the cost of the loan however they do not give any benefit if rates go down.

Variable Rate Loans

Unlike fixed-rate loans, variable rate loans carry “floating” interest rates that are tied to changes in the credit market. The interest rate can rise as set out in the loan documentation, so while a drop is favorable, a hike is also possible. Variable rate loans generally have lower interest rates and shorter terms than fixed rate loans because of the reset to match the credit markets. They are considered a riskier choice for consumers since there is the potential for the loan to become more costly. Typically, a variable rate loan is a good option for consumers who plan to pay their loan off quickly as many variable rate loans come with an initial set interest rate for a short period before they reset.

Personal Lines of Credit

A personal line of credit is a flexible personal loan which has a limit. The lender will extend credit in a set amount from which a person may borrow from for a given period of time, it is available when the borrower needs it. A line of credit will charge interest as soon as the money is borrowed from the lender, the interest only be charged on the amount taken, not the amount for which the total credit line available. Personal lines of credit may be secured or unsecured, and may have a fixed or variable interest rate. Personal lines of credit may also have fees associated with them to maintain the line as the lender effectively commits to making you a loan when you need it and has its own costs to keep these funds available for you.

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