Throughout the course of your life, you might stumble into some situations where your back is against the wall and you need some funds fast to help you out. Or maybe you’re looking to make a potentially life-changing purchase, like buying a home or a car, and need some financial help. In either case, a personal loan may be able to help you out.
The uses of a personal loan can be somewhat wide-ranging. It’s for this reason that there are all sorts of different types of loans out there to cater to different needs. And if you’re planning on applying for one, you’re going to need to not only have a good understanding of your specific needs, but also the type of loan that’s best suited to your situation. If you don’t, your gap in knowledge could do some serious harm to your finances.
So, in this article we’re hoping to help you close that gap by going over some of the important features of some common types of personal loans! We’ll touch on the differences between secured and unsecured loans, go over some broad categories of loans, and then briefly look at some more specific reasons to borrow money. Let’s dive in.
Secured vs. Unsecured Personal Loans
Generally speaking, a personal loan can be categorized as either secured or unsecured. One of the main differences between the two is what it’ll take for you to be qualified. Usually, there are also substantial differences in the rates and terms that go along with each type. These are all important factors when it comes to deciding what types of loans may work for your situation, so it’s important that you understand the distinctions.
Secured Personal Loans
With a secured personal loan, you’re going to need to put up collateral in order to be qualified. Collateral is essentially a valuable asset that you promise to give to a financial institution as payment in the event that you’re not able to pay back your loan. It ensures that they won’t leave empty-handed if you can’t meet the financial obligations of the loan. In some cases, the thing that you’re using the loan to purchase – like a house or a car – will act as the collateral for the loan.
So, why would you use a secured personal loan vs. an unsecured one? Typically, they’re applied for when you need to borrow a lot of money for a big purchase. When you’re borrowing large sums of cash, the lender is often going to want a firm and tangible assurance that you’re going to hold up your end of the bargain. The collateral you pledge is the assurance they’re looking for. It can also help to get you qualified for favorable loan rates and terms.
Unsecured Personal Loans
With an unsecured personal loan, there’ll be no need to pledge an asset to be qualified. You’ll need to prove that you’re a reliable borrower in other ways.
While the requirements to qualify for different types of personal loans with different lenders won’t be the same, there are a few components that tend to overlap. The first one is your credit score. This number is meant to give a lender an idea of what type of borrower you are, and it sometimes plays a central part in your quest to get approved for a loan. On top of your credit score, your income, state of residence, and employment can be important factors in getting approved.
The rates and terms that may be available to you is another important distinction between secured and unsecured loans. Because there’s no guarantee that a lender will get anything in return when they approve your application for an unsecured loan, they take on more risk. What does this mean for you? Well, generally, the rates can be higher and the loan limits can be lower with unsecured loans.
4 Common Types of Personal Loans
Now that we’ve looked at the differences between secured and unsecured personal loans, we’re going to take a look at some of the more common types of loans. There’s plenty of variation within each of these categories, as we’re just looking at each type in general terms, but when you’re looking for a personal loan, there’s a good chance you’ll run into one or all of these in some form or another.
1. Payday Loans
A payday loan is a personal loan that comes with a relatively small loan amount and a shorter term. How short? Well, it lies in the name. Whether you’re looking at fast payday loans online (where fast refers to the application process) or from a storefront lender, you’ll be given a lump sum and will need to pay your loan back along with any applicable charges by your next pay date.
If you’re considering payday loans online or in person, make sure to do your research before applying. Generally, the fees and interest rates are high, and they need to be repaid relatively quickly, so they should really only be considered a last resort when you need help taking care of an emergency expense. They should be approached with caution and should never be used for any sort of long-term financial problems.
2. Installment Loans
Like a payday loan, if you’re approved for an installment loan, you’ll be given a lump sum of cash. One of the key distinctions between the two is when you’ll be due to repay the loan. With an installment loan, the repayment period may stretch from anywhere between several months to several years, depending on the type of loan and the lender. The payments are pre-determined and in equal amounts. Since these payments are spread out over a period of time, it can help to reduce the amount you owe for each payment and may make it easier for you to make them on time.
3. Personal Lines of Credit
A line of credit (LOC) is a type of personal loan that breaks from the traditional structure of a payday or installment loan. Instead of being given a lump sum, a LOC is a revolving form of credit. This means that if you’re approved, you’ll be given a credit limit that you can draw money from as long as you have available credit and your account is in good standing. You can choose how much you borrow at any given time as long as it’s within your credit limit. You’ll also only be charged interest and/or fees based on the amount you borrow, not the total amount of your credit limit. This is what can make them a more flexible borrowing option than certain types of other loans.
4. Credit Cards
Certain personal loans may be useful when you’re trying to make a big purchase, but for smaller things, credit cards may be a better option. Like a line of credit, they’re revolving, and similarly, you’ll only pay interest and/or fees on what you’ve borrowed. While you’ll have the option to meet a minimum payment every month (instead of paying back what you’ve borrowed in full) in order to keep your account in good standing, you’ll start to accrue interest. To avoid this, try to keep your purchases small and make sure you’re always able to pay back what you’ve borrowed in a timely manner.
Other Types of Personal Loans
The three types of loans we just listed are fairly broad categories of personal loans, but you may run into certain situations that either require something more specific, or where you’ll need a borrowing option that we haven’t already gone over. These can include things like:
- Mortgages: These are personal installment loans that you apply for when you’re looking to buy a home. You’ll typically need to put forth a down payment and the rest of the cost of the home will be taken care of by the mortgage which you’ll need to repay over a long period of time.
- Auto Loans: These are also types of installment loans that are meant to help you buy a car. These are typically secured loans, where the collateral you’re putting up comes in the form of the car you’re buying.
- Student Loans: These are loans given to students, often by the Federal Government. They will generally have relatively low rates, are sometimes partially subsidized by the government, and in some cases, you won’t need to start paying them off until after you graduate.
- Personal Loans for Bad Credit: These can fall under the category of a line of credit, installment loan, or a payday loan. They’re intended for people with bad credit who are having a hard time getting approved for a loan. Generally, the financial institution will place less emphasis on your credit score and instead will focus more on other factors like your income and employment situation. They should only be used for emergencies.
Personal Loan Alternatives
When you’re in a situation where you need money, personal loans shouldn’t necessarily be your first choice. While it might be hard to get away with buying something as expensive as a house without borrowing money, with smaller purchases, there may be other avenues you may want to consider first.
You won’t always be able to rely on your savings, particularly if you need financial help in an emergency you weren’t able to anticipate, but if it’s something that can wait, it’s a good idea to save up for that purchase on your own. This can help you avoid taking on debt and interest payments needlessly.
If you do want to try to avoid taking out a loan the next time you run into an emergency, start putting money towards an emergency fund. These are designed to help you take care of all or at least some of the expenses that can come along with an emergency, like an unexpected home repair or a surprise medical bill.
Do Your Research and Consider Your Options
There are a lot of different types of personal loans designed for all sorts of different scenarios. It can be overwhelming at times to evaluate your potential options and try to find something that works for you. But to approach the process of applying for a personal loan without doing the proper research can lead to potentially severe consequences for your finances.
So remember, before you apply for a loan online or in person, make sure you ask the right questions, evaluate your situation, and be thorough in your research. Overall, be considerate whenever you’re thinking about borrowing money. We hope this article has helped!