Personal loans are the most popular type of loan around. What options are there for personal loans? What are the different types of personal loans? What are the most common types of personal loans you can use.
Most persons take at least once in their life a personal loan. In the past decade, the role of personal loans in the US has been increasing. At the same time, the number of companies offering these loans have been on the rise. These include peer to peer lending companies like Lending Club and Prosper as well as well known online lending platforms like Upgrade and SoFi, and payday loan companies. As a result, American households have more than $13 trillion in debt.
An unsecured loan is one where you are not required to put something as a security or collateral. Most personal loans being offered today are unsecured loans. For example, if you use a peer to peer lending platform like Lending Club, you don’t need to put an asset as a security. Instead, the lender will look at your income and credit score and then determine whether you qualify.
Pros of Unsecured Loans
Unsecured loans have several advantages compared to the other types of loans:
- Many lenders. There are so many lenders of unsecured loans. These include banks, online platforms like SoFi, and peer to peer marketplaces like Prosper.
- Use of the loans. You can use unsecured loans in any way that you want. You are not limited to how you use the loan.
Cons of Unsecured Loans
The main challenges of unsecured loans are:
- Good credit score needed. Although Personal loans with bad credit are possible, for a good personal loan with good rates, you do need a good credit score to get an unsecured loan.
- Regular source of income. You need to have a good source of income to access these loans.
The opposite of an unsecured loan is a secured loan. This is a loan that you access if you have a security. This security is also known as a collateral. If you default on your loans, the lender will take the collateral and auction it. The security could be a house, car, or any other asset.
Advantages of secured loans
There are several advantages of secured loans. These advantages are:
- Easy to get the loan. The lender will give you a loan as soon as they verify that you own the asset. They also have to verify the worth of the asset.
- Low-interest rates. The lender will charge you a lower interest rate because they are sure that you will pay back the money.
- Many lenders. There are many lenders who are open to extend the loans to you.
Disadvantages of secured loans
- Your asset could be taken if you don’t pay back the loan.
Personal Loans: Revolving Credit
If you have watched Shark Tank, you have likely heard the sharks talk about a line of credit. This is a credit that is extended to a company. The company can withdraw these funds up to a certain amount. A revolving credit personal loan works in a similar way. A lender will assess your net worth and then extend a line of credit to you. This line will have a limit to which you can withdraw. A good example of a revolving credit is a home equity line of credit (HELOC).
Advantages of a revolving credit
- Cash flow planning. A revolving credit is great when you have bills to pay but don’t have cash at hand. For example, if you have bills that are due before your pay date.
- Additional rewards. Many revolving credit providers usually provide additional rewards like loyalty points.
Disadvantages of a revolving credit
- Discretionary spending. A revolving credit can make you spend more money on products that you don’t need.
- Higher interest rates. This credit usually have a higher interest rate than a secured loan.
- Asset can be seized. In case of a HELOC, there is a likelihood that your asset is seized if you can’t pay the money.
Personal Loans: Payday Loans
Another type of personal loans is payday loans. These are usually short-term loans that are usually offered mostly by online companies. The loans usually last for a few weeks. While the concept of a payday loan is usually great, the biggest challenge is that these loans have very high interest rates. It is not uncommon to see many providers of payday loans have an interest rate of above 100%. Therefore, we recommend that you don’t use these loans.
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Other types of personal loans
The other types of personal loans are:
- Fixed-rate loans. These are loans whose interest rates don’t change. The benefit of this arrangement is that you are protected when interest rates change.
- Variable-rate loans. These are loans whose interest rates change based on the interest rates of the moment.
- Cosigner loans. These are loans that are guaranteed by another person. You should consider a cosigner if you have a bad credit.
Having a good understanding of the types of personal loans available to you is very important. Doing this will help you know the type of loan to chose and what to expect from the lender.