What kind of personal loan types will help you the most?

As you continue to enter new phases of your life, you are likely to come across new expenses. This has always been a financial reality, but as you age and your responsibilities increase, this financial reality may become more frequent.

For this reason, personal loans have become popular as a convenient way to fund important life events as they happen, in exchange for a monthly repayment plan. Personal loan types can be as unique as the consumer who is shopping because they’re tailored to the needs of the consumer.

Whether you are putting an addition on your home, funding a wedding, or even consolidating your debt, there are personal loans available that can bring all of these expenses within reach.

And because personal loans can be so unique, there is a great deal to know about them. Here are few basics to get you started.

Know the difference between a “secured” personal loan and an “unsecured” personal loan

A big detail in the realm of personal loans is whether the loan you are applying for is a secured or unsecured loan. The difference is simply this: A secured loan requires you to put forth some collateral for the loan, while an unsecured loan requires no collateral of any kind.

There are pros and cons to both types of loans, but it depends on your situation. There is a higher sense of risk often associated with a secured loan, as there is inherent potential of losing whatever asset you put forth as collateral. However, this type of loan typically comes with a lower interest rate.

An unsecured loan, which does not require collateral, is widely assumed to automatically come with a higher interest rate. While this is a good rule of thumb, be aware that the interest tacked on to your loan largely depends on your credit score. The better your credit score, the better your chances of obtaining a personal loan and acquiring good interest rates, whether secured or unsecured.

Difference between Fixed-rate and adjustable-rate loans

When it comes to interest rates, there are additional options you have. A fixed-rate interest is an interest amount that remains the same each month. Most loans come with fixed rates, which can be beneficial in repayment planning, and enable you to stick to a consistent payment schedule. By looking at an interest calculator, you can see the life of the loan and plan for this amount accordingly.

Adjustable-rate loans, on the other hand, will have interest that can adjust over the course of its life. This can work in your favor at times, or be higher than you would prefer at other times. Largely, these shifts in interest rates are due to market behavior. As a sort of trade off, these loans tend to start off with smaller interest rates that build over time, so some consumers might see this as an advantage for immediate purposes.

Additionally, there are typically caps that would be put in place on adjustable-rate loans, but there is still an additional level of risk affiliated with a type of interest rate that is more difficult to plan for.

Short-term personal loans

A loan doesn’t always have to be for a significant project or event. There are certainly moments in your life when having access to quick cash would bring a goal closer to view. There are loan types which are intended for small amounts, commonly for a few hundred dollars or so.

However, since these loans are for such small amounts, you must remember to separate the needs from the wants when it comes to borrowing for significant purchases. Not to say you are unable to use a personal loan for a want as opposed to a need, just make sure you are budgeting accordingly and continuing to work on your savings efforts.

Debt consolidation loans

Loans are designed to provide the financial assistance that your lifestyle needs at that time. And for this reason, debt consolidation loans exist to help you manage your debt. Essentially, a debt consolidation loan is a loan written to you for the amount of your total combined debts. In this instance, the lender is going to take care of all the debts from your plate, which means you will now owe the lender that amount directly.

This can be advantageous if you are juggling multiple debts, perhaps with different interest rates, and want to simplify your repayment system. You now have a single payment to meet every month, and a set interest rate, which is much easier to plan for in your budget.

Another advantage to debt consolidation is that you are able to include a credit card balance into this amount as well, which could benefit your credit utilization rate and, ultimately, help your credit score.

What makes sense for you

There are many other personal loan types available to you, and if you are entering a stage of life where some extra capital would simplify a part of your life and make a goal more attainable, then speak to a lender and learn what options are available to you, and more importantly, what options make sense for you and your lifestyle.

 

 

Sources:

“Personal Loans — What You Need to Know,” the balance, August 2020

https://www.thebalance.com/different-types-of-personal-loans-4767765

 

“Types Of Personal Loans,” Forbes, August 2020

https://www.forbes.com/advisor/personal-loans/types-of-personal-loans

 

“Types of Personal Loans,” nerdwallet, October 2020

https://www.nerdwallet.com/article/loans/personal-loans/personal-loan-types