October 6, 2022

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The 4 Main Types of Personal Loans

As a student, it’s important to know what kind of loans are available. (Photo by Andrea Piacquadio from Pexels)

Many young people make the mistake of thinking of loans as a chunk of free money. Loans aren’t the same as grants or scholarships; it’s essentially your money that you’re borrowing from the future. This is why credit can be so important, as some lenders will not trust you to borrow money if they see no source of money in your future and have no record of money from your past. 

Traditionally, this is why it’s harder for young people to acquire loans: they have had less time to prove financial responsibility and they usually have less collateral to offer lenders. 

Student loans, of course, are fairly easy to get because they are offered with the understanding that it will probably take longer to repay. Student loans count toward your credit, and are considered good credit score builders because you can pay them off for decades if need be. But not all loans count toward your credit score.

If you have a limited credit history and you need a loan, it may be wise to find one that will be reported to the three main credit agencies. Especially a secured personal loan with a lower APR that provides you a longer window of time on repayment. While you have to put up some collateral (car, co-signer with a home deed, etc.) for a secured loan, it’s considered a smaller investment risk and usually carries lower rates.

Each time you make a payment on a loan like this, you get positive marks in your credit report. These are the types of personal loans no credit history can mess up.

A secured loan is just one of four main types of personal loans. Before signing up for any loan, you need to make sure you thoroughly know the terms and conditions because there are usually stiff penalties for backing out or trying to change things further down the road. 

The other three types of personal loans are as follows:

Unsecured personal loans

Unsecured personal loans don’t require collateral but you will need a good credit history. In fact, unsecured loans are pretty much based solely off your credit score. But because these are considered riskier investments for lenders (they have no collateral to fall back on if you can’t make your payments), they typically vet the borrower more strictly and charge higher interest rates. There are many different variations on an unsecured loan but they all involve some level of leveraging one’s credit history in lieu of collateral. 

Fixed-rate loans

Fixed rate loans are loans for which the interest and monthly payments remain fixed and do not fluctuate based on economic forces, which can sometimes cause interest rates to shift. Of course, this can also be a disadvantage, as sometimes interest rates can fall and gift the borrower an unexpected windfall. 

However, while you won’t benefit from a falling rate, you will also have a stable guaranteed monthly amount, which can make it easier for financial planning and budgeting. Many first-time homeowners sign up for fixed-rate loans so that they can carefully chart their monthly expenses without too many unknown variables. 

Variable-rate loans

Variable rate loans are the flip side of fixed-rate loans, featuring interest rates that can rise or fall based on the economic winds of the moment (though there usually is some kind of cap). These loans typically come with a lower monthly APR but if interest rates rise, you can end up paying more on a given month.College is a good time to build your credit so that when the time is right, you can apply for personal loans and business loans. People don’t buy houses or build companies over night out of nothing; these each require various kinds of loans with differing terms and rates. And without collateral or credit history, it’s very difficult to land any significant kind of loan. Also, be careful who you borrow money from and research the company or organization thoroughly. They’re not the only ones taking a financial risk: more than a few people have had to unravel some messy financial situations because of bad or toxic loans.

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