Taking out a personal loan is a great way to close a gap in your budget. Whether you’re experiencing financial hardship, are looking to make a large purchase, complete a home renovation project, or even pay off another loan that is accruing interest at a higher rate, personal loans can allow you to get access to a much-needed cash injection.
What is a personal loan?
A personal loan is often a loan that is unsecured, that is to say, not backed by collateral such as a home or a vehicle. Your credit score determines your ability to get a personal loan, what type of personal loan, and at what interest rate. The higher your credit score, the better your chances of being approved for a low-interest personal loan. Even if you have a good credit score, unsecured loans will often have higher interest rates than secured loans. This is because a bank or lender has more to lose with an unsecured loan. Certain types of personal loans have exceptionally high-interest rates, and so should be taken out with caution and paid back quickly.
Personal loans are a type of installment loan that will give you a lump sum cash payment at once. You will then be expected to pay the loan back in installments that span over a few years (plus interest).
What kind of credit score will you need?
Credit scores range from 250 points to 850 points. Your credit score is an educational score that allows lenders to assess your risk levels as a loanee quickly. A low credit score often signifies a high personal debt load, recurrent missed payments, consumer report or bankruptcy.
If your score is below 579, it’s considered very poor, and you won’t get very good interest rates on a personal loan. However, if your score is 800 and 850, you have an exceptional credit score and will get the best interest rates lenders can offer and will have access to any personal loan on the market.
Types of Personal Loans
There are multiple kinds of personal loans that each caters to different sections of the population and different needs. Here are nine types of personal loans you may see advertised and what they will mean for you.
Unsecured loans
This is a very common type of personal loan. As mentioned above, this type of loan is not backed by any collateral, which makes them riskier for lenders and means they will charge higher interest rates.
However, if you have a good credit score and you shop around, you may be able to get an unsecured personal loan with a good interest rate that you will be able to pay off in installments over the course of a few years. Companies like OppLoans offers unsecured personal loans, but like any lender, it’s important to learn about the company first using something like LoanReview HQ that you can see here: https://loanreviewhq.com/lender/opploans-review/.
Secured loans
Unlike an unsecured loan, a secured personal loan is backed by collateral which your lender can seize if you default on the loan. The most popular examples of secured loans include mortgages and auto loans.
Lenders may offer secured personal loans, which allows you to borrow against personal assets, such as a car. The rates on secured personal loans are often better than unsecured loans because they are less risky.
Fixed-rate Loans
A fixed-rate loan is a conventional method for many types of loans, personal or not. These types of loans are paid on a consistent monthly basis at the same rate for the life of the loan. A fixed-rate personal loan makes sense if you are looking to have regular payments and have concerns about rising rates on long-term loans. These loans work well for budgeting.
Personal lines of credit
A personal line of credit is similar to a credit card. Unlike a secured or unsecured personal loan, a personal line of credit gives you access to a set amount of credit instead of a lump sum. You can take from this amount as needed. You pay interest only on what you borrow and can increase or decrease the total amount available to you. Many people use a line of credit for ongoing costs, rather than one large purchase.
Co-signed loans
If your credit history is spotty or your score is low, you may need to opt for a co-signed loans. This type of personal loan relies on a co-signer with a strong credit history signing off on your loan. This promises that you will pay your loan, or your co-signer will be forced to pay, and their credit score will be affected. Having their name on your loan may get you a more favorable interest rate.
Variable-rate loans
Unlike a fixed-rate loan, a variable rate loan’s interest changes based on the market. Depending on how the benchmark interest rate set by the banks fluctuates, the rate on your loan will rise and fall–this will also include your monthly payments and your interest rates.
One benefit of variable-rate loans is that the interest rates are typically lower to start. Some of these loans will also have caps on the amount your rate can change, or at what speed. This can be beneficial if your loan has a short repayment term since even if rates rise, they won’t surge over a short period.
Debt consolidation loans
This is a unique type of loan that allows you to roll all of your existing debt into one single debt, usually with a lower APR than your existing debts. This will help consolidate all your payments into one single payment. However, this is a type of loan that often has higher interest rates. This is because debt consolidation is often something high-risk borrowers with spotty or low credit scores will gravitate to since it will simplify their debt load. Some debt consolidation loans can have interest rates as high as 30 percent, depending on the lender and the applicants’ history.
Short-term borrowing
These types of loans are usually a smaller loan that is loaned out for a short period, at a very high interest rate. You are essentially borrowing against your future pay to get money. These types of loans rarely turn any borrower away and will often charge you a set fee up front, then give you a small lump sum payment. The danger with these types of loans is their punitive interest rates, which accrue rapidly. You should only rely on short-term borrowing if you have exhausted all other types of loans available to you or are in dire straits. Be sure you can pay it back quickly and on time, or you will suffer interest rates up to 30%.
Pawnshop loans
Pawnshop loans are a simple, quick way to borrow money without worrying about a credit check. However, this comes at a price. A pawnshop relies on goods brought in by borrowers that the pawnshop will assess and place a value on. The person bringing in the item (think musical instruments, electronics, or antique weapons), will then be offered a loan in that amount. The pawnbroker then keeps the item until you can pay it off. If you can’t pay it off, the pawnbroker will then sell the item–usually at an inflated value.
Risks of personal loans
While many people take out personal loans and pay them off with no issue, many types of personal loans exist in a gray area of morality. Loans like pawnshop loans or money advances are all high-interest or high-risk loans that may end up costing you much more than you ever borrowed. If you end up with one of these loans and you fail to pay it back in time, interest will accrue at a punitive rate that could spiral you further into debt.
Since most personal loans aren’t secured by property or collateral, paying off the loan consistently and on time is essential. If you don’t, the lender can take you to court and sue you, and your credit score would still end up in ruins.
It’s also important to be wary of scams when it comes to personal loans. Anyone who is offering a fast loan at a low-interest rate is most likely trying to lure you into a loan agreement that is a scam looking to steal your money. One of these types of scams is called an “advanced fee” loan. This is where you are offered a credit card or loan even if you have no credit history or bad credit history, but you are asked to pay a fee first. Then, once you wire the money, no credit card, loan, or paperwork arrives and the money is gone for good.
To avoid situations like this, talk to your bank or credit union about types of loans they may have available for people with bad credit or low credit scores. It’s important to remember that nothing is free and that a personal loan that sounds almost too good to be true often is. Research potential companies, investigate the type of loan being offered and do your best to make payments consistently and on time to keep your credit score up. Having a solid credit score is your best bet for getting a stable personal loan from a reputable lender at a low interest rate.
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