Thinking of borrowing some extra cash? If so, you’re in good company: studies show that loans are a fact of life for many Americans, with the average consumer carrying over $90,000 in debt.
Of course, just because personal loans are a common financial tool doesn’t mean all types of personal loans are created equal. From simple fixed-rate loans to options that consolidate debt, there are plenty of choices available to fund what you need. How can you tell the difference to decide which one is right for you?
No matter what’s on the horizon, it’s worth knowing the fine details and requirements of the loans available to you. Here’s what to keep in mind before you borrow.
Unsecured Personal Loans
With unsecured loans, you’re borrowing money without putting anything down as collateral, which would “secure” the loan. As a result, they’re riskier for your lender—which can mean a higher APR, or annual percentage rate. In some cases, you may also need a higher credit score, which can stand as proof of trustworthiness.
Secured Personal Loans
As their name suggests, these types of loans allow you to borrow money with collateral. This means you’ll tend to get a lower APR out of the deal.
In some cases, your lender will let you borrow against an asset like your personal savings. However, the most common options for collateral include your home and your car for mortgages and car loans, respectively—which we’ll get into below.
Also called a home loan, a mortgage can help you finance any real estate purchase. You’ll find a huge variety of options available for borrowers, including special terms for first-time homeowners. In some cases, you can also get mortgages for investment properties, as Modern Loans explains.
However, if you fail to meet the terms of your mortgage, you’re putting your house or property at risk—which can lead to foreclosure and eviction.
An auto loan can help you buy a vehicle when you need it, and many banks and even dealerships offer this loan option. As with a mortgage, you’re putting your car at risk if you fail to make payments, as your lender can seize your vehicle if you aren’t repaying the loan.
Revolving Line of Credit
In some ways, a line of credit has more in common with a traditional credit card than a personal loan. As with a credit card, you’ll be entitled to borrow up to a set credit limit on an as-needed basis, and you’ll pay interest on what you borrow. You’ll need to make regular payments if you carry a balance.
The most common types of revolving credit are personal lines of credit or home equity lines of credit (HELOCs). These can be the best personal loans for anyone who needs help managing their personal finances, as it offers emergency funds for unexpected bills and payments.
These loans come with fixed interest rates, meaning that you’ll be able to pay set monthly payments without worrying about tracking interest changes over the life of your loan. This makes them great for borrowers who find it easier to budget with consistent payments, and it can also offer peace of mind.
However, because your interest never changes, fixed-rate loans tend to have higher interest rates from the start than variable-rate loans.
In contrast to fixed-rate loans, the interest of these loans will vary. This variation happens according to a set index rate. As this index rate fluctuates, your monthly payments and the cost of interest will vary as well.
In some cases, this can mean you’re paying less in interest than you would with a fixed-rate loan, especially because your interest tends to be lower from the start. However, the opposite can also be true, with your monthly payments making sudden spikes.
If you’re fighting against barriers to taking out a loan on your own—like a low credit score—a cosigned loan can help. With this option, you’ll ask someone else to vouch for your trustworthiness. This person will need to have a strong credit history to make them a good candidate for cosigning in the eyes of your lender.
In some cases, you’ll be able to qualify for more favorable terms and a lower interest rate. However, if you’re unable to pay back the loan, your cosigner will bear the responsibility for it. Worse, this responsibility can cause both of your credit scores to drop if you fail to make payments.
Also known as a wage advance, a payday loan allows you to borrow emergency cash against an upcoming paycheck. Instead of paying back the loan in several installments over a set period of time, you’ll pay it back with your next paycheck.
Because these loans are so short-term and involve high APRs, they tend to be a risky bet. Many borrowers find themselves unable to pay in time, taking out additional loans to make up the difference.
Debt Consolidation Loans
These loans are an easy way to roll several different debts into a single new loan. Your lender will deposit enough money into your bank account to pay off your existing loans, and you’ll pay back the new loan with a new repayment term and interest rate. Many people find that debt consolidation loans are a great financial management strategy, as they can help save on interest and simplify monthly payments.
Get Up to Speed on the Different Types of Personal Loans
Whether you’re getting married, buying a home, or consolidating debt, it’s important to understand the types of personal loans above. Knowing the details of their terms, interest, and collateral can help you make an informed decision before you sign on the dotted line, saving yourself many headaches down the road. As you work to find the right option, don’t hesitate to reach out to a reputable lender for more personalized advice!
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