Types of Personal Loans
Personal loans are short-term borrowing with a fixed repayment period. They can be unsecured or secured. Unsecured personal loans are not tied to your credit score and therefore do not affect your credit rating. However, you should be aware that the higher the interest rate on an unsecured loan, the more likely you are to pay more interest over the life of the loan than you would with a secured loan.
Secured personal loans are tied to your credit score and impact your rating. The interest rate on these loans can be lower than unsecured loans, but they may also have fees or other charges that reduce their overall cost.
This personal loan guide highlights various types of these loans.
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Debt consolidation loans
A debt consolidation loan is an unsecured personal loan where you consolidate multiple debts into one loan. This allows you to make bigger monthly payments and pay off your loans faster. You can also use this financial tool to reduce interest rates and save money in the long run.
A cosigned loan is a personal loan where the borrower has to cosign the application with someone else. The loan will only be approved if both you and your cosigner can prove that you can repay the loan. A joint loan is a personal loan where both borrowers sign for it. This means that both borrowers must be able to prove that they can repay their share of the loan.
Unsecured personal loans
An unsecured personal loan means there are no collateral requirements for getting one of these loans approved by lenders. Unsecured personal loans are popular among those who have good credit scores but don’t want to use their house as collateral for a loan because they might not be able to sell it in time if they need money suddenly, or they might end up paying more interest than they would if they had used something like their house as collateral.
A personal line of credit
A personal line of credit is a type of unsecured loan that can be used to cover short-term financial needs, such as paying off debt or making home improvements. It is generally easier to qualify for a personal line of credit than other types of loans because it does not require showing that you can repay the money in full and on time.
Personal lines are available in varying amounts and from different lenders, so comparing rates is essential before choosing one. Lenders typically issue personal lines on a revolving basis, allowing you to borrow as much money as you need for as long as seven days in most cases. You make regular payments on time until your account is paid off, at which point the lender will close out your loan and return any remaining funds back to your bank account or credit card account.
Secured personal loans
Secured personal loans are one of the most popular types of personal loans. They are available to borrowers who want to secure a specific asset to make the loan payments, such as a car or home. This type of loan is also known as a collateralized personal loan, which means that your loan’s security comes from something other than yourself. The value of the collateral can vary but typically ranges between 20% and 80% of the loan amount, depending on your situation and financial circumstances. The collateral you choose will determine how much money you can borrow and when to pay it back.
The main advantage of secured personal loans is that they offer more flexibility than other options, such as standard unsecured loans. You don’t need to provide any additional collateral because you already have something valuable that can be used as security for your loan payment.
Fixed-rate loans offer a higher interest rate than variable rates but lower than the prime rate, which is the rate at which banks borrow money from each other. They are generally for two to five years, although longer-term fixed-rate options are available.
Because fixed-rate loans offer less flexibility in managing your monthly payments, they’re generally only suitable for borrowers with an established credit history who can afford to make larger monthly payments.
Adjustable-rate mortgages (ARMs)
Adjustable-rates mortgages (ARMs) are another type of personal loan that can be used to consolidate debt or pay off credit cards. There are two types of ARMs: fixed-rate and variable-rate. A variable-rate ARM has an adjustable interest rate that can change each month, while a fixed-rate ARM has an interest rate that remains unchanged throughout the duration of the loan. Both types have limited maximums for monthly payments, but they differ in their length of time before those limits kick in and become due.
Revolving credit is a type of credit that allows you to borrow funds against your available balance. It’s also known as a revolving line of credit, which means it can be used to make multiple purchases over time. The main difference between this type of loan and other types is that it’s not secured by collateral. Instead, the lender assumes the risk if you don’t repay the loan on time.
Variable-rate loans are the most common form of personal loans. It may be appealing to borrowers because they offer lower interest rates than fixed-rate loans and are often more flexible, depending on the borrower’s needs at a point in time.
With a variable-rate loan, the interest rate on your loan is tied to the prime rate, which can change daily. This means that if there is an increase in prime rates, you will be charged a higher interest rate and vice versa.
Personal loans offer more flexibility than other types of loans because there are no set rules about when or how much you can borrow. They are good for short-term cash needs and can remain used for any purpose, such as buying groceries or paying for a vacation. Personal loan generally have lower interest rates than other types of credit cards and home equity lines of credit (HELOCs).