When it comes to financing, it pays to pick the best option for your situation. (iStock)
Personal loans are the fastest-growing type of consumer debt — perhaps you’ve even considered applying. Personal loans can be an effective way to consolidate debt, pay unexpected home repairs or make a large purchase. But is a personal loan for you?
There are several different types of personal loans to consider depending on your situation. So, before you sign on the dotted line, make sure 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
- Cosigned loans
- Debt consolidation loans
- Personal line of credit
Read through this list carefully to determine the best type of personal loan to get for you.
1. Unsecured loans
An unsecured personal loan is an installment loan that is paid back in monthly increments over time. Since it isn’t backed by collateral, this type of loan can be easier to acquire if you have good credit.
Loan amounts depend on your credit score. Personal loan lenders typically offer personal loans between $1,000 and $50,000 — or as much as $100,000 to borrowers with excellent credit. Loan lengths usually range between one and six years.
Credible can help you find an online lender. Just enter your desired loan amount and estimated credit score into this free tool to view personal loan interest rates.
HOW TO GET A $100,000 PERSONAL LOAN
Personal loan interest rates typically range between 5 percent and 36 percent, depending on your credit score. Since the lender takes 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 backed by collateral, such as a car, savings account or another asset. If the borrower defaults on the loan, the lender can seize the asset to cover all or a portion of the balance.
Secured loans are less risky for personal loan lenders, and they may offer lower interest rates, making it one of the cheapest personal loans available. In addition, lenders may be more flexible about their credit score requirements, which means it 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 loan lenders in order to find lower interest rates.
HOW TO GET A PERSON LOAN IN 7 EASY STEPS
3. Cosigned loans
A cosigned loan is an unsecured or secured loan that has more than one party guaranteeing repayment. If you have bad credit or no credit history at all, a lender may ask you to have a cosigner, who will assume and pay the loan if you default. For the lender, a consigner is a form of insurance. Having one may improve your chances of being approved as well as provide better terms for the loan.
You can find a list of lenders that offer personal loans with cosigners here. After browsing this list, head over to Credible's main personal loan hub to learn more.
3 PERSONAL LOAN LENDERS THAT ACCEPT COSIGNERS
The advantages of taking out this type of loan go to the borrower who can qualify for more money or better terms. It’s important to note that the cosigner has disadvantages. The loan will show up on their credit report and missed or late payments can negatively impact their score. Carefully consider this type of loan and understand that the financial risk associated with it has the potential to damage your relationship.
4. Debt consolidation loans
A debt consolidation loan combines multiple 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 you reduce your overall monthly costs into one affordable payment by avoiding multiple interest rates and late fees.
If you decide debt consolidation is the right step, it’s important to shop around for the best type of personal loan, rates and terms. Fortunately, Credible makes it easy.
SHOULD I USE A PERSONAL LOAN TO CONSOLIDATE DEBT?
You should also take advantage of an online personal loan calculator to determine costs.
A pitfall that consumers can encounter after getting a debt consolidation loan is the temptation to run balances back up 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 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 revolving form of credit, similar to a credit card. In contrast to an installment loan that involves a lump sum repaid in monthly payments, borrowers are given access to a line of credit up to a certain amount that can be borrowed as needed. Interest is charged only on the outstanding balance.
A personal line of credit can be put in place to cover unplanned expenses for emergency personal loans or fluctuations in income. Some lenders may offer a secured line of credit backed by an asset. And some allow you to set up a line of credit that is connected to your checking account to cover overdrafts.
You need two things in order 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's no easy answer to this question. After all, there's no such thing as a one-size-fits-all personal loan. So, you really have to take a hard look at your financial situation and determine what you need the personal loan for.
Before applying, look at the interest rate to determine how much it will cost. The annual percentage rate (APR) includes interest as well as fees the lender charges expressed as a percentage. According to the Federal Reserve, the average 24-month personal loan has an APR of 9.5 percent.
Also, determine how long you have to pay back the money. Your interest rate will be based on the length of the loan, with shorter terms usually offering lower interest rates. Most loans offer terms that range from six months to seven years. Your first payment will be due about 30 days after you sign the papers, so be sure you’ll have enough money in your budget.
Before you choose a personal loan, spend time exploring your options. More than a fifth of respondents to a 2020 U.S. News & World Report survey said they didn’t do any research before applying. Use Credible's free tools to crunch the numbers.
5 QUESTIONS TO ASK BEFORE CHOOSING PERSONAL LOAN
Since rates and terms can vary greatly, this has the potential to be a costly mistake. Know your options and understand what you’re signing. A personal loan should help your financial situation, not cause damage or put you at risk later.