Keeping ahead of the game when it comes to your finances can often be a challenge. We all find ourselves in situations where we could do with some money. In these circumstances, it is not uncommon to borrow money in the form of a personal loan.
There are many different types of personal loans available and a range of different lenders that offer these loans.
It’s vital that you consider your options well and find the best personal loans. But which type of personal loan is right for your needs?
In this article, we’ll look at the different types of personal loan available.
What Is a Personal Loan?
If you need to borrow money so that you can make a substantial purchase, you might want to consider taking out a personal loan.
Typically, this type of loan will be for several thousand dollars. You’ll be able to make repayments on this type of loan over a long period. This is usually several years.
You could borrow money for almost anything within reason. You could take out a loan for a car, renovations around the home, wedding costs, medical expenses, debt consolidation, or furniture and appliances.
The Types Of Personal Loans
There are several types of personal loans. These include:
- Secured loans
- Unsecured loans
- Debt consolidation loans
- Personal line of credit
There are pros and cons to each type of loan. The option that you select will depend on your personal financial situation, what the loan is for, and your own personal needs.
Some lenders, such as Plenti, offer a variety of different loans for a number of different circumstances.
A secured personal loan will require you to use an asset as security to take out the loan from the lender. Typically, you could offer up your home, car, or even jewelry as security.
If you don’t make repayments on your loan in line with the payment schedule, then the lender will be within their rights to seize the asset and take possession of it.
With this type of loan, the bank will get security against you defaulting on the loan, and you’ll be able to enjoy the lower interest rates that the bank provides.
The pros of a secured loan are that this type of loan is one of the easiest to obtain from reputable lenders. You’ll also get lower interest rates and lower fees because there is less risk to the lender.
The cons of taking out a secured loan are that you could find your car or home repossessed if you don’t keep up on your payments. Once the lender has taken possession of your property, they will sell it to recover any money that you owe.
With an unsecured loan, you are not required to put up any collateral as security to the lender.
This makes this type of loan accessible to people who don’t own their own homes, or have their own vehicle.
You may need to demonstrate to the lender that you are able to make the repayments on the loan. You can do this by providing wage slips. You will also be subject to credit checks to find out how credit worthy you are.
If this is the first time you’ve ever taken out a loan, you may need to have a guarantor to help you obtain an unsecured loan.
The pros of this type of loan are that it’s a great option if you don’t own any valuable assets you can offer up as security. You’ll generally enjoy better interest rates than some other types of lending such as credit cards.
The cons of this type of loan are that there are high penalties if you make payments late. The lender may also take legal action against you if you were to default on the loan. In comparison to secured loans, you’ll need to pay bigger fees and higher interest rates.
If you are a student, you’ll no doubt be on quite a tight budget. You may not have the time to work and gain a proper income, and you’ll have living costs and tuition fees to deal with.
Luckily, many banks and other lending institutions recognize that students are under considerable financial burden and are able to provide student loans to assist you.
You could use this money for buying textbooks, paying for accommodation, or paying your course fees. Being able to take out a student loan may mean that you don’t need to hold down a part time job while you’re studying.
The pros of a student loan are that they can be deferred for several years after the end of your course and some lenders don’t have an upfront fee attached to the loan.
The cons are that interest will apply to the loan from the date that you take it out. This means that the debt can really stack up.
Debt Consolidation Loans
If you have multiple sources of debt, it can be hard to manage all of the different payments. Not only will you have multiple payments to consider, you’ll also have a variety of different interest rates to contend with.
One solution to this problem is to take out a debt consolidation loan.
The benefits of this type of loan are that instead of having several payments, you’ll have just one. Not only that, but you’ll have a more competitive interest rate which means that you’ll be able to clear your debt quicker.
The downsides to this type of loan are that there is always a risk of getting into bad spending habits and getting further into debt quite easily once you have a lower repayment.
Personal Line Of Credit
A personal line of credit or an overdraft is good to have in case of anything unexpected coming up. It lets you overdraw your account up to an agreed amount which you’ll establish with the bank.
You’ll only ever pay interest on any money that you actually use, rather than on the maximum that you can borrow.
The advantages of this type of loan are that you get access to additional money when you need it most and the interest is only applicable to what you use.
The drawbacks are that the interest rate on this type of debt is typically higher than on other types of personal loans.
Interest Rates On Personal Loans
There are two options when it comes to repaying your personal loan, and these are fixed interest rates and variable rates. Which you chose comes down to personal preference.
With a fixed interest rate, the interest rate is locked in for the entire life of the personal loan. This means that because the rate won’t change, budgeting will be a lot easier.
The benefits of this type of interest rate are that you’ll avoid the stress of interest rate hikes and repayments will stay the same throughout the duration of the loan.
The disadvantages are that you’ll usually pay higher fees than variable rate loans and you’ll miss out on any lower interest rates if the market rates drop.
With a variable rate loan, the interest rate could change at any time during the lifetime of the loan. As rates fluctuate, so too will repayments.
The advantages of this type of interest rate are that you’ll enjoy lower fees in comparison to fixed rate loans. If interest rates drop, your payments will be lower.
The drawbacks are that it can make it harder to budget your repayments as they are likely to fluctuate. Also, whenever interest rates rise, your payments will also rise.
How Long Should Your Personal Loan Be For?
When getting a personal loan, you’ll also be given a choice of how long you’d like to make repayments over. Generally speaking, the minimum term length for your personal loan will be one year. The maximum length will be seven or ten years.
If you take out a shorter loan, you’ll enjoy a lower rate of interest.
Which Types of Loan Suits Your Needs?
Before taking out any type of personal loan, it’s vital that you carry out a bit of research into the various personal loan options available to you.
Always check to ensure you understand the terms of the loan such as how it is repaid and the interest rates.
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