More than 20 million Americans have applied for personal loans.
Everyone needs financial help at some point. Be it school fees, hospital emergencies, or debt consolidation, there are many things that demand urgent finances. Sadly, personal savings are often not enough to settle those needs, and that’s where personal loans come in handy.
A personal loan is borrowed money. You can borrow the cash from a bank, credit union, or any other financial institution. This guide will give you a comprehensive answer on what are personal loans, and the common types available. Keep reading to learn more.
What Are Personal Loans?
A personal loan is the amount of money you borrow from a financial institution to settle an urgent need. You can get the loan from a bank, a credit union, an online lender, or other private lenders.
You can repay the money as a lump sum, although many institutions accept the installments payment. The frequency and amount of the installment depend on the amount of loan you take and the lender’s preferences.
When you apply for a personal loan, the lender checks your credit score to know your history for paying debts. If you have many unpaid debts, your credit score will be low and the lender will consider you a risky borrower. An excellent credit score helps you secure the highest amount of personal loans at the lowest interest rate.
Types of Personal Loans
Personal loans are the most popular and fastest-growing types of loans. They have a straightforward application process, affordable interest rates, and convenience too.
Here are the common types of personal loans.
Secured Loan
A secured loan requires collateral. Collateral is any valuable asset that you can provide to the bank as security. If you don’t pay the loan per the agreement, the lender sells the asset and owns the money.
Examples of collateral include a piece of land, car, building, etc. The market value of the asset you provide should be equivalent to your loan. If your asset’s current market price is high, you can get a substantial loan amount at the lowest interest rate.
Unsecured Loans
Unsecured loans do not involve collateral. The loan amount entirely depends on your credit score and not the value of assets.
Lenders consider the unsecured loans riskier than the secured loans. Since you don’t provide the security, there is no guarantee that you will pay, and that’s why the interest rates may be high. The loan amount may also be low, and the repayment period may be short to minimize the risk.
You must have an excellent credit score when applying for an unsecured loan. Otherwise, you will risk getting a low loan amount, or even worse; you may be disqualified.
Co-signed Loans
A co-signed loan may be secured or unsecured. It involves multiple guarantors who take full responsibility for the loan repayment in case the borrower defaults. The guarantors are known as co-signers.
You can’t mention anyone as a co-signer to the loan without their knowledge or consent. You must notify them and they must be present during the loan application.
The co-signers should also sign the loan application form to prove that they know of the agreement and that they will repay the loan if the borrower defaults.
Debt Consolidation Loans
A debt consolidation loan is ideal for people with many debts. Multiple debts can be stressful, mainly if they have high-interest rates. The payment can also be inconveniencing since you have to pay numerous lenders.
The debt consolidation loan combines all those single loans into one loan. When you apply successfully, you only make a single payment to one lender. However, you must maintain discipline when repaying the consolidation loan. This is because you can get the temptation to apply for other personal loans and increase your debts.
You should also have an excellent credit score. Otherwise, you can’t secure a debt consolidation lender if you have not paid your past loans.
Personal Line of Credit
This loan is similar to a credit card. The lender deposits money to your line of credit which you can borrow anytime you need. The only difference between the line of credit and the other loans is that you don’t receive a lump sum.
However, the money is kept in your credit line, meaning that you can borrow and withdraw as many times as you wish.
The main advantage of this loan is that you only pay for what you have used. For instance, if there is $2000 in your credit account line and you have only used $1000, you will only pay for the $1000 you have used.
The loan is great, although the interest rate may be slightly higher than that of other loans.
Bad Credit Personal Loans
Most of the loans above require the borrower to have an excellent credit score. Don’t worry if your score is poor (below 620). There are many personal loans for bad credit which you can consider.
The bad credit loans can help you repair your car, settle an emergency, or even consolidate your loan. You can get a bad credit loan from a bank that offers that option or private sources. These sources include:
- Family and relatives
- Credit unions
- Payday loans
- Tap home equity
- Payroll advances
Note that bad credit loans might have a higher interest rate. The repayment period may also be shorter since the lender considers you a risky borrower. Nevertheless, the loans provide a handy help when no other bank can accept your application.
If you don’t need the loan to settle an emergency, work on your credit score. Start paying the old debts and stop applying for more credits. The on-time payments and no credit applications will increase your score and you will qualify for better personal loans.
Choose the Right Loan
Hopefully, you now know what are personal loans and the different types available. However, you should not rush to apply any loan mentioned above without understanding its basics.
Each loan has its pros and cons which you must understand. Review each loan type carefully, understand the requirements, and ensure that you qualify. Do not hesitate to consult a financial expert regarding the best kind of personal loan to consider.
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