Types of Personal Loans: Which is Right For You
- 2 min read
- Personal loans are usually unsecured, fixed interest rates.
- Personal loans are available for a wide range of purposes. The most popular reason is a debt consolidation loan.
- Personal loans are offered by a wide range of lenders. One popular type of personal loan is online loans
What Types of Personal Loans Are Available?
Are you considering taking out a personal loan? Most likely you have heard of the most popular type an unsecured, fixed interest, debt consolidation loan.
However, there are other types of personal loans. While they have similar characteristics, take a few minutes to learn about the different features and then, you find one that fits your financial situation.
Here are some of the easiest ways to classify personal loans:
- Secured vs. Unsecured
- Reason to Take a Loan: Debt Consolidation vs. Other Reasons
- Bad Credit vs. Good-Excellent Credit Loans
- Fixed vs. Variable Interest Rate
- Online Lender vs. Bank
Six Ways to Look at Personal Loans
1) Secured vs Unsecured Personal Loans
The most popular type of personal loan is an unsecured loan, sometimes referred to as a signature loan. Secured loans require that you pledge an asset as security. The most popular types of secured loans are home mortgages and auto loans.
Your credit is an important factor in qualifying for an unsecured loan. You might need to consider other options if you have bad credit. If for example, you don’t qualify for an unsecured personal loan, then ask your lender about a credit building loan or a secured line of credit, or search for a different way to pay off your debt.
One particular type of personal loan is a student loan, which is mostly offered through special government programs. Private student loans require good credit and a stable income. Instead of requiring collateral, you are required to bring a co-borrower or guarantor as additional security.
Pros and Cons of Unsecured Personal Loan Pros Cons
|Fixed interest and predictable monthly payments.||Very attractive interest rates if you have excellent credit.|
|Very attractive interest rates if you have excellent credit.||Quick qualifying process and funds very quickly. Short term (between 2-5 years), so possibly high monthly payments.|
|Quick qualifying process and funds very quickly.||High-interest rates if you have bad credit. This type of loan might not be the best solution.|
2) Reason for Taking Out a Personal Loan: Not Just Debt Consolidation
There are many different types of personal loans based on the loan purpose. While debt consolidation loans are the most popular type of loan, you can get a personal loan to pay for many other reasons, including home improvements, student expenses, special occasions, large purchases, auto, baby, boat, business, green, household expenses, medical & dental, moving and relocation, taxes, vacation, and the list goes on!
The terms are similar regardless of the reason you use to get a personal loan. The advantages of a personal loan for one purpose can actually be a con for a different reason.
Pros and Cons based on Loan Purpose
|Can get a loan very quickly to pay for an emergency.||Taking on more debt can lead to a Higher Debt-to-Income Ratio (DTI).|
|If used correctly, helps you get out of debt and control your budget.||May not be a wise use of your money and impede saving.|
3) Bad Credit Personal Loans vs. Good to Excellent Credit
Who hasn’t heard of a “bad credit personal loan”? It almost sounds like a contradiction in terms. Can you get a personal loan with bad credit?
In general, the better your credit, the lower your interest rate. One of the most important factors lenders use for personal loan qualification is your credit score. Lenders use the credit score ranging from Excellent to Bad. Your credit score may disqualify you from getting a loan, or you may qualify for a lower interest rate if you are not in the top tier.
When shopping for a personal loan, carefully consider if this is the best solution for your financial goals. Are you trying to consolidate debt with bad credit? Are you saving enough money to pay for big-ticket items?
Pros and Cons of Bad Credit Loan
|Can get a loan very quickly and avoid late payments and collections.||Especially if you have bad credit, the loan may be too expensive and not the best solution to your debt problems.|
|While, an excellent credit allows you to raise money at a low-interest rate, even with bad credit, you can use a personal loan to simplify payments, or pay for emergencies||The temptation to add more debt and not control your credit card spending.|
4) Fixed vs. Variable Interest Rate Personal Loan
Most personal loans are for a short period and have a fixed rate. A fixed rate loan has stable, predictable payments. Once you decide on the loan amount and the repayment period, your monthly payment is fixed. Check the terms, including the interest rate and fees when shopping for a loan.
Use Bills.com APR - Personal Loan Calculator to figure out your monthly payments and total finance charges.
However, some banks and lenders offer revolving lines of credit, similar to a credit card. A revolving line of credit allows you to borrow money up to the authorized amount of the line of credit. Similar to credit cards, you can borrow money, pay it back, and borrow it again. The interest rate is based on an index, such as the prime rate plus a margin. The prime rate fluctuates based on the market, and the margin generally remains stable.
Pros and Cons of Fixed Interest Rate Personal Loans
|Predictable monthly payment.||May come with high origination costs, especially if you have bad credit.|
|Easy to budget||A fixed rate loan is a one-off transaction, with no flexibility.|
5) Bank Loans vs.. Online and Peer-to-Peer Personal Loans
Traditionally, banks, such as Wells Fargo and Citibank, offered their customers personal loans and lines of credit. Often, they offer discounts if you have some other product. Some years ago, peer-to-peer lenders appeared in the marketplace, including Prosper and Lending Club. Peer-to-peer lenders created more competition. Their loans reach a diverse clientele with a heavily tiered interest rate table. For example, Prosper has fixed interest rate loans that range between 5.99% APR and 35.99% APR.
With the onset of Fintech companies, there are now many online personal loan lenders in the last few years.
Check out Bills.com review pages to learn about different personal loan lenders, such as SOFI, Avant, Net Credit, and more.
Pros and Cons of Fixed Interest Rate Personal Loans
|Online lenders have a quick and easy application process.||Especially if it is a bad credit lender, make sure that they are legitimate.|
|Funding is fast.||Banks may have special offers if you are a preferred customer.|
6) Other Types of Personal Loans
You may consider other types of personal loans. Your cheapest source may be a family loan. Who knows, it might even turn into a gift. However, not everyone has a friend or family member who can lend them money.
Often the time we most need money is in a time of emergency. If the car doesn’t get fixed right away, how are you going to get to work? Or, you really need some dental work quickly? And, who plans on going to the emergency room for a broken arm or appendicitis?
Unfortunately, many households do not have emergency savings funds. One type of personal loan that can help is a short-term loan, such as a payday loan. Those loans can save the day if you have money to pay them back. Basically, it is like getting your paycheck early. However, living paycheck to paycheck means you don’t have extra money to pay back the loan. Payday loans can be costly debt traps, so think carefully before taking one.
Another type of last-resort personal loan is a pawnshop loan, which is a secured personal loan that requires collateral. If you cannot come up with the money to pay back the loan, this will be a very expensive way to raise money.