What are the Different Types of Personal Loans?
If you are in a position where you are considering a personal loan, you probably have a lot of concerns. Being in a position to need a personal loan often brings about stress. It usually means that you need cash right away for some bill you cannot afford to pay. You may have some unexpected repair bill or medical procedures that bring about their own stress. On top of that, you do not have the money to pay for it. There is some good news for you. There are many options available to you. Many of which you may not be aware. I will walk through all of your options including the many types of personal loans in this article.
What Is A Personal Loan?
If you are considering a personal loan, it is important that you fully understand a personal loan. It is important that you have a full working knowledge of personal loans so that you can make the best decision for your needs. The most basic description of a personal loan is when someone allows you to borrow a set amount of money. You agree to repay the money by making regular monthly payments. Typically, the lender is a bank, but it can be a credit union, online lender, and even family and friends. The lender charges you a fee to let you borrow the money. The fee is called interest. Your credit rate dictates your interest rate. The higher the interest rate means the more you pay per month to repay the loan.
There are many different types of personal loans. It is helpful for you to go personal loan shopping when considering a loan. This gives you information about all the loans that are available and helps you make the right choice. With so many lending options available to you, you do not have to take just any loan. You can and should make sure you have the right loan for you. If you have less than perfect credit, you may have less options.
However, there are still options available to you. It is important that you understand all of your options when it comes to a personal loan. You also need to make sure that you can afford to repay the loan. When you do not pay the loan back on time, it impacts your credit and potentially causes late fees which just adds to the amount you are already paying. You should take all of this into consideration when thinking about a personal loan.
Different Loan Types Explained
One aspect of personal loans that can be really confusing are all the types the lenders offer. When you are in a rush to find money for financing anything in your life, you should probably stop for a second and think about this. Depending on which type of personal loan you choose, you will be faced with different conditions and obligations. So here is everything explained in detail.
Loan Types #1 – Traditional Loans
I mentioned that there are many different types of personal loans available to you. I want to highlight some of them for you. This way you can understand what is similar and what is different about all of them. This help you make the right decision. There is no such thing as having too much information. First, let us take a look at traditional lenders. When I talk about traditional lenders, I mean the banks that you know well. You may not love them, but I know you know them. They are the buildings that are brick and mortar. They are the banks that you can still walk into and there are tellers and loan officers to help you. Many of them do have online banking options, so you do not have to go into the bank. Many of these banks started out as neighborhood banks but have changed with the times and now offer more services online.
If you go into these banks to obtain a loan, someone is there to help you. Most likely, they will fill out the paperwork for you. These banks prefer to lend to those who have good credit. They are not the best at lending to those who have less than perfect credit. If they do lend to someone with bad credit, the interest rates are really high. They also may take a little longer to process your application and get the money to you, if approved. If you are approved for a loan with them, most likely they want you to open up a bank account with them, if you do not already have one.
Loan Types #2 – Online Lenders
Online lenders offer some of the other types of personal loans. There was a time when online lenders were for those with bad credit. They used to only offer loans with high interest rates. That is no longer the case. Online lenders are transforming the world of borrowing money. Now you can apply for a loan online in minutes. You are able to upload any documents directly from your computer to your application. It literally take minutes to apply and submit all documentation. You receive a response in less than 24 hours. The money is in your bank account in about 24 hours from your approval. All of this happens in about two days. That is why many people are interested in online lender.
For those with good or better credit, you can find online loans that offer you low interest rates. It is incredibly easy to research a personal loan online. With so much information available online, you can easily find all the information you need to make the best decisions about the right loan for you. The major downside to online lenders is being aware of which lenders you can trust. In our world of internet fraud and identity theft, you cannot be too careful. Do your research and find out what you can about any online lender in which you are interested. The information is available to you, you just have to look. This is not the time to get lazy. A quick search can give you tons of information about a lender. Be sure you know the lender is legitimate before you press submit.
Loan Types #3 – Fast Cash Loans
I know I probably sound like a broken record but there are many types of personal loans available to you. You should keep in mind, just because you can borrow money, does not mean you should. Just because you can borrow money from a certain lender does not mean you should do that, either. There are some loans with which you want to proceed with caution. Fast cash loans are those loans. They may come in the form of payday loans or title loans. Either way, they can be dangerous.
A title loan is when you use the title of your vehicle as collateral. These lenders do not typically check your credit. That may make them seem like a good idea for those with bad credit. However, they usually have high fees and interest rates. Also, keep in mind, you give them the title to your vehicle to hold until you repay them. Usually, you have to repay within a short period of time. The lender determines the value of your vehicle and does not allow you to borrow more than a certain percentage of that value. Just in case you missed it earlier, if you do not repay this loan, the lender can take your vehicle because you offered it as collateral.
Payday loans are another type of loan that gets you cash fast but move forward with caution. These loans are for small amounts and they have a ridiculously high interest rate. You must repay this loan on your next payday, hence the name. You give the lender a postdated check for the full amount of the loan. Yes, that is correct, you must pay back the loan in full on your next payday. The lender requires proof of your income so he can see how much money you earn with each paycheck. Also, the lender does not allow you to borrow more than your paycheck amount. The lender receives authorization from you to access the money in your account so they can receive their payment.
Loan Types #4 – Secured Loans
One of the other types of personal loans is a secured loan. A secured loan is often a mortgage or an automobile loan because they come with their own collateral built into the loan. However, there are some personal loans that are secured. That means that they have collateral attached to the loan. This is usually something expensive, that is worth more than the total loan amount. It can be a house, or car, or even jewelry or an expensive collectible. If the lender can prove the value of it, they may accept it as collateral.
Once you have offered something as collateral for a loan that means that if you default on, or do not pay, the loan, the lender can take your collateral in place of repayment for the loan. In the case of it being a house, the house is foreclosed on and you are kicked out of your house. If it is a car, the vehicle is repossessed. In short, you do not want to lose whatever it is that you used for collateral. Since these loans are secured with an item, the lender usually lets you borrow a higher amount of money than with an unsecured loan. These types of loans also have a lower interest rate because the lender feels more secure about them.
Another way you may be able to secure a loan is to have a cosigner. You may not be approved for the loan on your own, but if someone with good credit is your cosigner, the lender may agree. The cosigner is promising that you will repay the loan in full and on time. If you do not pay back the loan, the cosigner is responsible for your loan and must pay it. If the cosigner does not pay your loan, it will negatively impact his or her credit.
Loan Types #5 – Various Types Of Interest
When it comes to understanding the different types of personal loans, you should also understand the different types of interest. For personal loans, there are really two types of interest. There is fixed interest and variable interest. Fixed interest is just that, fixed. Whatever the interest amount is when you sign the loan papers, it is for the life of the loan. This means that your payments are the same each month and do not change. You always know how much you owe and there are not any surprises. The downside to a fixed interest is the interest amount is usually higher. Most people feel as though this is a price worth paying for the security of a fixed interest amount.
The other type of interest is a variable rate. This is different from the fixed rate because it changes. This rate is closely tied to the prime rate. All interest rates are based on the prime rate. Lenders use the prime rate as their base and then add however many percentage points they would like. With a fixed interest, you lock in when you sign on the dotted line. With a variable rate, you never lock in, unless the lender gives you a chance to at a later date. That usually does not happen with personal loans. That is more likely on a mortgage, but let us continue to focus on personal loans.
When the prime rate changes, so does your interest rate. Often the lender has a limit on how much it can fluctuate and how often. Even with those parameters in place, your loan payment changes. It may change in your favor and go down. But, it always goes back up again. These rates may be a little lower to start, but think carefully before pursuing this option.
Why Does My Credit Matter?
I know you do not want to hear it but your credit matters for most types of personal loans. What you really need to know about credit is this…a typical credit score is anywhere from 350 to 850. Most people have a credit score between 600 to 750. Good credit falls between 670 to 800. Anything below 570 is the danger zone of bad credit. When you have bad credit, it is much harder to get a good interest rate. You may find it is difficult to be approved for a loan, if you have bad credit. It is still possible to get a loan, but you have to work harder and do more research.
It takes a long time to build up your credit and only one or two missed payments to send it plummeting. Yes, that is correct. The number one cause of bad credit is late or missed payments. Creditors do not care why your payments were late. They only care that they were late. The number on your credit record does not tell the story. It does not give a full picture of you. Lenders pull your entire credit record to try to put together the pieces. They are not always successful. Sometimes, a lender wants to know your story and why you had moments of missed payments. Some of them listen to your reasons and consider them in determining if they should allow you to borrow money.
What Do I Do If I Have Bad Credit?
If you think you have bad credit, you should find out for sure. You need to pull your credit report and look at it. You cannot do anything to correct it until you know what it says. If you see any errors, you should correct them immediately. This can help improve your credit score. Once you have done that, you need to work on improving your credit score in other ways.
First, you should decrease your debt to income ratio. That means you need to start paying down your debt. You should work hard to decrease it as much as possible. You also need to make sure you make all of your payments on time and in the amount that is due. Even if you can only make the minimum payment at first, pay only that amount. It is more important to pay the minimum on time than to pay more late.
There are all types of personal loans, even a personal loan for bad credit. Your options may not be as plentiful as those who have great credit, but you still have options. You have to do some more legwork to find loans when you have bad credit. You have to do the research to determine who can offer you the best loan terms. Remember, just because a lender offers you a loan does not mean you should take it.
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Why Should I Create A Budget?
Creating a budget is one of the smartest things you can do. If you are considering any of the types of personal loans, you should first make sure you can afford to repay the loan. There are many tools available online to help you create a budget for yourself. Most people do not like to even think about budgeting. They think it is some barbaric form of control. Well, I prefer to look at it as you taking control of your finances. It is you stepping into the driver seat and applying gas. You gain an understanding of how much money you earn and how much you spend. You see the items on which you spend money each money. It is in front of your face in black and white. You cannot argue with the numbers.
I am willing to bet you spend more money per month than you realize. I am also willing to bet that you are going to be shocked when you see exactly on what you spend money. You should not even consider a loan until you know you can afford one. The simplest way to do this is gather all receipts and information about where you are spending money. Write it all down and add it up. Then, you subtract that amount from how much money you bring home. Hopefully, that number is a positive number and you can see how much you can afford to repay in a loan. If that number is negative, you already have a problem and should no longer consider a loan.
How Do I Save Money?
So, let us say that number is a negative. Now what? Well, first let us not consider any of the types of personal loans at the moment. We can put that to the side. Take a look at the items on which you spend money. Where you can make cuts? The first place to look is that gym membership that you do not use. If you have one and you do not go, you are not going to start going now. Cancel it. If you have any subscriptions that you are not using, cancel them immediately. You could save yourself a hundred dollars right there. That was easy, right? Let us keep going. It gets a little harder.
Now look at how often you eat out and cut that in half right away. If you can, cut it down to two times per week. That includes breakfast, lunch, dinner, and coffee. Yes, I said. Make your coffee at home and save a ton of money. Start preparing your own food. It is amazing how much money you can save. That is probably hundreds right there. Next look at how much money you are spending on groceries.
Start making a list before you go to the store and stick to it. Make sure you are purchasing sale items. Maybe you need to switch to a less expensive store. You can save a tremendous amount of money this way. Look at your cable and phone bill, can you make any changes there to decrease the amount of money you are spending? Call them and see what can of deal they can offer. You never know unless you ask. You should do that with all your regular bills and see how much you can save.
How Do I Know If A Personal Loan Is For Me?
It is possible that once you create a budget and begin cutting costs, you determine that you are saving so much money that you do not need a loan. However, that may not be the case for you. Even after all the cost savings, you still have high credit card bills or some other unexpected cost that you just cannot afford right now. Before you look at the different types of personal loans, look at the budget you created earlier. Now that you have all these savings, add up your expenses again. Now, subtract them from how much you make. Hopefully, now you have a positive number. This number shows you how much you can afford to repay per month in a loan. You should not get a loan that requires you to repay more than that amount because you cannot afford it. If you cannot afford to repay the loan, your credit score suffers. You also bring a lot more stress to your life.
Are There Alternatives To Personal Loans?
There are other options besides all the various types of personal loans. Many of these options are not going to get you cash fast. You can get a part time job. This allows you to bring in extra money and you possibly will not need a loan. You can ask a family member or friend if you can borrow money from them. This is not a hit to your credit and most of the time, you do not have to pay interest. You can work hard and cutting costs in your budget and really make some changes that gives you a lot more money each month. While there are other options to obtaining one of the types of personal loans, they may not be the best options for you at this time.
It always comes down to you deciding what is right for you in this moment. If you already know that you cannot afford any of the types of personal loans, do not get a personal loan. If you know how much money you can afford to repay, then you can consider one of the types of personal loans. You have to do what is in your best interest. No one else can make that decision for you. You have to be in control of this decision. You are the one that is going to make the loan payments, so why would you let someone else decide for you? Do not put yourself in a worse financial position. Make the best decision you can with all of the information available.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.