What are the Common Types of personal loans Available for Me Today?

What are the Common Types of Personal Loans Available for Me Today?

Most personal loans in the world today are unsecured.

They carry a fixed interest making them the go-to solution when it comes to emergencies, big purchases and debt consolidation – especially if your emergency fund is low or depleted.

There are different types of personal loans that you can apply for.

The type that works best for you will depend on a number of factors like your credit score, time needed to repay and the amount you are willing to part with every month in form of instalments.

This article simplifys the whole question of personal loans and helps you understand different types of personal loans in the market today. You will also learn what they are best for, their advantages and disadvantages.

1. Secured personal loans 

Secured personal loans are backed up by a collateral. It can be an asset or savings in your bank account.

As a result, most lenders offer exclusive low interest rate given that chances of them losing their money is almost none existent.

An example of this loan is mortgage (secured by the house) and car loans secured by the car title.

Some banks and credit unions offer secured personal loans backed by a colateral like your house, car, bond, CD or any other asset that holds value greater than the loan you are seeking.

In as much as secured loans is the best way to access money without paying hefty fees and high interest rates, you should avoid ones that fall into car title and payday loans category. They are not only exhibit predatory characteristics but also charge interest as high as 1000%.

Pros

  • Low interest rates.

These loans are secured and therefore no-risk on the side of the lender.

As a result, the interest rate charged are as close to the base rate as possible making them cheap for borrowers in the short and long run.

  • They are easier to get one from reputable lenders.

Con

  • More risk on your side.

In as much as a collateral is a security on the side of the lender, it comes as a risk to you. If you fail to pay the loan, the lender will seize the asset which will be auctioned to recover their loan.

2. Unsecured personal loans

Unsecured personal loans forms the majority of personal loans disbursed by lenders today.

They are not backed by any collateral making them riskier for the lenders and beneficial to the borowwer.

As a result, lenders charge higher interest rates which range from a low of 5% to a high of 36% and repayment terms of up to 7 years.

In order to increase your chances of getting approved for these kind of loan facility, you should have a strong credit score, stable income and low debt to income ration.

However, there are special instances when lenders offer these types of loans without credit history or income but based on a pure promise to pay in the near future.

An example of this is student loans.

Pros

  • Low risk to individual.

This type of loan does not require you attach a collateral; therefore, by taking the loan, you will be risking none of your existing savings or assets in the process.

  • Best option if you have no assets or sizable savings to use as a colateral.

Cons

  • This loans demand a strong credit score, higher income and low debt levels for your loan application to be processed fast.

However, you can still get one even with less than perfect credit score which is rare.

  • They attract a higher interest rates compared to secured loans.

While secured loans charge interest rates close to the base interest rate, unsecured personal loans rates can go up to 36%.

3. Fixed rate personal loans

Fixed rate personal loans offer the same interest rate and equal monthly installment for the period of the loan.

It is the best option if you are conscious of rising interest rates or want consistency in payments for the purposes of budgeting.

Most personal loans are fixed rate loans.

Pro

  • It offers stability to the borower.

You will pay the same amount every month until you clear the loan.

You will not have to worry about the changing interest rates because fihxed nature of interest rates charged on you will never change.

  • Easy to budget for.

You will know how much to put a side for the purpose of clearing your loan.

Cons

  • Higher rates and fees.

The lender takes the risk of stabilizing your fixed interest rate, therefore, they will end up charging you more.

  • You are bound to miss out on low interest rates in case market rates fall suddenly and remain low.

4. Variable interest personal loans

Interest rates on these type of loans vary according to the benchmark rate set by the central bank or the Fed.

They can rise and fall therefore affecting your interest rates, monthly installments and the amount you are to repay at the end of the loan period.

However, these loans have lower APR compared to the fixed interest ones.

Sometimes, they can carry a cap on how much your rates can fluctuate cushioning you.

They are a good option if you are borrowing short term (3 months to 1 year). For this period, chances are high you will enjoy low interest rate.

By any chance the interest rates rise, they will not rise beyond manageable limits in a stable economy.

Pros

  • You will benefit from low interest and fees in the short run therefore making it cheap for you.
  • If the interest rates fall further, you will end up paying less.

Cons

  • If interest rates go up, so will your payments.
  • It is difficult to budget for this type of the loan.

5. Debt consolidation loans

Debt consolidation loan is designed to help you get out of loan faster.

It combines all your existing loans into a single loan.

Often, the new loan carries a lower APR compared to your existing debt therefore you save on interest.

Also by consolidating, you simplify your fragmented debt into one repayment channel with fixed monthly terms.

Pros

  • It helps you clear debt fast and cheaply.
  • Consolidation brings your fragmented debts into a single channel for purposes of easy repayment.

Con

  • You risk accumulating more debt as a result of you feeling debt free and falling into a spending spree.

6. Personal line of credit/Overdraft

Personal line of credit or overdraft allows you to withdraw more than the balance in your account, up to a limit set by the bank.

It is a good option in times of emergency or sudden need for spending on ongoing expenses and your emergency fund cannot cater for it fully.

Once you overdraw, you will pay a fixed interest on the amount borrowed until you clear the debt.

Pros

  • You are guaranteed of instant money when the going gets tough.
  • Interest is low and is charged only on what you use.

Cons

  • The interest rates charged is often higher than other types of personal loans.

You should therefore pay it off fast in order to attract less charges.

7. Payday loans

A payday loan as the name suggests is unsecured type of personal loan you are required to repay with your next paycheck as opposed to paying in instalments.

Typically, the interest rates are very high (tripple digits) and fixed up front.

The amount disbursed is not much. A few hundred dollars up to one thousand are typical norm.

Pros

  • You get the loan fast without the need for a collateral other than you payday.
  • The approval process is almost instant.

Cons

  • Very high interest rates.

A 3 digit interest rate is normal here and can go to as high as 5000%  for a 10 days loan.

  • You risk getting tied to a cycle of unending debt.

When you cannot repay the previous debt fully but you are allowed to seek a new one.

8. Credit card cash advance

You can use your credit card to take a loan facility at the bank or credit union near you. You can also withdraw directly from an ATM.

Typically, credit card companies charge a higher interest rate for this type of withdrawal compared to normal swiping when making purchases.

In addition to high interest, most companies charge cash advance fee in form of dollar amount (like $20 or $50) or as a percentage of the amount withdrawn.

Pros

  • It is instant and fast way to get much needed money.
  • It is more convenient for everyone with a credit card at hand.

Cons

  • Its is an expensive way to get money.

The interest rates for credit card cash withdrawal is higher than the normal credit card APR.

  • You risk maxing out your credit limit in the short run, accumulating more debt and hurting your credit score.

9. Pawnshop loan

This is a secured type of personal loan.

You borrow a specific amount of money and secure it with an asset or precious belongings like high end jewelry and electronics.

The collateral is deposited at the pawn shop before the money is disbursed (often in cash form).

If you fail to furnish your within th agreed timelines, you attract penalties.

And, by any chance you are not able to repay completely, the collateral is sold to settle your loan.

Pawnshop loans have high interest rates of up to 300%.

However, they are more modest compared to payday loans which have rates as high as 5,000%.

Pros

  • The loans are instant and straightforward.

You get disbursed there and then and in cash.

Cons

  • You risk loosing your precious item.
  • The interest rates are predatory and punitive.

They can easily surpass the value of your item withing few weeks making it pointless to claim your asset back.

10. Peer to peer lending

Peer to peer lending is the new entrant to personal loans lending systems.

It involves a platform where you can apply for a loan, list your details and someone else within the platform will respond with an offer. If you agree with it, then will you seek the loan.

These platforms are often unregulated by authorities but well managed by the companies behind them for the sake of business, reputation and increasing competition .

The tier system used by most of these platforms guarantees lower interest rates and higher loan amounts for credit worthy customers.

However, even with no credit history or bad credit score, you can still get a loan with favorable terms and lower interest rates than you can find anywhere else.

Pros

  • It is the cheapest option to get a personal loan.

You are not required to provide a collateral and most of the time, the interest rates are fixed and negotiable.

Cons

  • Peer to peer lending can be limiting to new members.

The amount you can borrow at each time is caped.

The more you develop your reputation with them, the more you get higher loan limits and lower interest rates, just like the normal  redit scoring system.

  • However, the peer to peer system is more flexible.

You can move your score up fast and enjoy relaxed terms.

Personal loansF.A.Qs

What are some of the fees associated with personal loans?

When it comes to personal loans, read the fine print more keenly before appending your signature.

Sometimes, there are sneaky fees here and there which end up affecting your final balance and screw your budget.

The common fees you should expect are:

  • Set up fees
  • Your normal monthly installments.
  • Early exist charges.
  • Late payment penalties.

When you don’t understand the wording well, feel free to ask for clarification.

Which is the best personal loan providers for me?

With the rising competition in the world of personal loans, more better offers come every single day.

You can compare hundred of products online easily and free before settling on one that suites your personal needs and preference best.

Among the most reputable outstanding lender with lower interest rates and better loan terms are:

  • Online banks

Not the cheapest but still offer rates and terms better than the traditional brick and mortar banks. they are also very reliable and efficient.

  • Credit unions

They offer the most competitive rates and lower fee unlike the banks.

  • Peer to peer lenders (P2P lenders)

They are the new entrants and often have the best interest rates and almost non-existent fees.

How do I get my loan approved fast?

To get your personal loan approved fast, you need to fulfil the following conditions:

Make sure you are creditworthy.

  • Build your credit score. The higher your credit score, the easier it gets to qualify for a higher loan with lower APY.
  • Seek your credit report and dispute any error you get.
  • Similarly, borrow less.
  • Know how much you can borrow at a time.

Most loan applications are rejected right away because the borrower decided to borrow more than they are allowed to.

  • Make sure you provide everything needed by the lender.

What do I need when applying for a personal loan?

Here is what you need before applying for a personal loan.

  • A proof of identity – national ID, Passport or any other document accepted as proof of who you really are.
  • Proof of income – a certified copy of financial statements from your employer or the bank or your tax compliance will do.
  • Financial details
  • A proof of residence

If you have any questions, clarification or doubts concerning the type of personal loans you are looking to apply for, let me know in the comment bellow.

liamrock

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