Personal loans are the fastest growing type of consumer debt — maybe you’ve even considered applying. Personal loans can be an effective way to consolidate debt, pay for unexpected repairs, or make a major purchase. But is a personal loan right for you?
There are several types of personal loans to consider depending on your situation. So, before signing on the dotted line, make sure that the personal loan and its terms are right for you.
What are the 5 types of loans?
Here are the five different types of personal loans to consider:
- Unsecured Loans
- Secured loans
- Co-signed loans
- Debt consolidation loans
- Personal line of credit
Read this list carefully to determine the best type of personal loan for you.
1. Unsecured Loans
An unsecured personal loan is an installment loan that is repaid in monthly installments over time. As it is not secured by collateral, this type of loan may be easier to obtain if you have good credit.
Loan amounts depend on your credit score. Personal lenders typically offer personal loans between $1,000 and $50,000 – or up to $100,000 for borrowers with excellent credit. Loan terms generally range from one to six years.
Credible can help you find a lender online. Simply enter your desired loan amount and estimated credit score into this free tool to view personal loan interest rates.
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Personal loan interest rates typically range between 5% and 36%, depending on your credit score. Since the lender is taking a risk with an unsecured loan, they may charge higher interest rates. This type of loan can be a good option for someone with good or excellent credit who wants a regular monthly payment.
2. Secured Loans
A secured loan is an installment loan that is secured by collateral, such as a car, savings account, or other asset. If the borrower defaults on the loan, the lender can seize the asset to cover all or part of the balance.
Secured loans are less risky for personal lenders, and they can offer lower interest rates, making them one of the cheapest personal loans available. Plus, lenders can be more flexible with their credit score requirements, which means this can be one of the best personal loans for bad credit.
Don’t worry about having to navigate personal loan options on your own. Credible can help compare personal lenders to find lower interest rates.
HOW TO GET A PERSONAL LOAN IN 7 EASY STEPS
3. Co-signed loans
A co-signed loan is an unsecured or secured loan whose repayment is guaranteed by multiple parties. If you have bad credit or no credit history, a lender may require you to have a cosigner, who will assume and repay the loan in the event of default. For the lender, a consignee is a form of insurance. Having one can improve your chances of being approved and provide better terms for the loan.
You can find a list of lenders that offer personal loans with cosigners here. After going through this list, head over to Credible’s main personal loan center to learn more.
3 PERSONAL LOANS THAT ACCEPT COSIGNERS
The benefits of taking out this type of loan go to the borrower who may qualify for more money or better terms. It is important to note that the co-signer has disadvantages. The loan will show up on their credit report, and missed or late payments can negatively impact their score. Consider this type of loan carefully and understand that the financial risk associated with it can harm your relationship.
4. Debt consolidation loans
A debt consolidation loan combines several debts into a single loan with a single monthly payment. Borrowers can use it to pay off credit cards, medical bills, payday loans, and other personal loans. Debt consolidation loans can help lower your overall monthly costs into one affordable payment by avoiding multiple interest rates and late fees.
If you decide that debt consolidation is the right step, it is important to research the best type of personal loan, the best rates and conditions. Fortunately, Credible makes it easy.
SHOULD I USE A PERSONAL LOAN TO CONSOLIDATE A DEBT?
You should also take advantage of an online personal loan calculator to determine costs.
One pitfall consumers may encounter after obtaining a debt consolidation loan is the temptation to collect balances on credit cards or other forms of personal loans. This personal loan can be a good option if you have the discipline to control your debt and if it offers a lower APR than your existing debts.
5. Personal line of credit
Finally, you may qualify for a personal line of credit. This loan is a form of revolving credit, similar to a credit card. Unlike an installment loan which consists of a lump sum repaid in monthly installments, borrowers have access to a line of credit up to a certain amount that they can borrow as needed. Interest is only charged on the outstanding balance.
A personal line of credit can be set up to cover unexpected expenses for emergency personal loans or fluctuations in income. Some lenders may offer a secured asset-backed line of credit. And some let you set up a line of credit that’s connected to your checking account to cover overdrafts.
You need two things to apply for a line of credit:
- An excellent credit score
- Good credit history
DOCUMENTS REQUIRED TO APPLY FOR A PERSONAL LOAN
What is the best type of personal loan to get?
Unfortunately, there is no easy answer to this question. After all, there is no single personal loan. So, you really need to carefully consider your financial situation and determine why you need the personal loan.
Before applying, look at the interest rate to determine how much it will cost. The annual percentage rate of charge (APR) includes interest as well as the fees charged by the lender expressed as a percentage. According to the Federal Reserve, the average 24-month personal loan has an APR of 9.5%.
Also, determine how long you need to repay the money. Your interest rate will be based on the term of the loan, with shorter terms generally offering lower interest rates. Most loans offer terms ranging from six months to seven years. Your first payment will be due approximately 30 days after you sign the paperwork, so make sure you have enough money in your budget.
Before choosing a personal loan, spend time exploring your options. More than a fifth of respondents to a 2020 US News & World Report survey said they didn’t do any research before applying. Use Credible’s free tools to calculate the numbers.
5 QUESTIONS TO ASK BEFORE CHOOSING A PERSONAL LOAN
Since rates and terms can vary widely, this can be a costly mistake. Know your options and understand what you are signing. A personal loan should improve your financial situation, not cause damage or put you in danger later.