Sometimes we can get in a pickle where money is the only way out. This situation could be anything imaginable such as an unexpected medical expense. But regardless, personal loans might help you in such tough financial situations.
That’s why we’re here to give you an article explaining the many types of personal loans. You can take a personal loan and expect anywhere between a year and five years to repay. But considering that there are many types of loans, we will get into explaining all of them. So with all that said, let’s start.
Secured Personal Loans
The first and most common type is the secured personal loan. These loans can be given by financial institutions such as banks and even pawn shops. The important thing about secured personal loans is that we give something in return as collateral.
While that’s how most loans work, what makes these so unique are the lower interest rates. Since we are minimizing risk by offering a valuable item in return, lenders usually give more favorable rates. Another great thing about secured personal loans is the fact that we can take out a much bigger amount if we give in return a much more valuable collateral item.
The only downside to secured personal loans is that the financial institution takes the collateral if you fail to repay. So if, for example, you are taking out a much larger amount of money and using your boat as collateral, if you fail to repay then the bank will take your boat as collateral.
We mentioned earlier that banks aren’t the only financial institutions that give out secured personal loans. You should always be wary of payday and car title lenders as they give secured personal loans with much higher interest rates.
Unsecured Personal Loans
On the other side of the aisle, we have unsecured personal loans. What makes these so different than secured personal loans is the fact that your credit score plays the deciding factor. If you have a relatively good credit score, then you are eligible for an unsecured personal loan. Plenty of factors impact your credit score. Some of the more important ones include your payment history, your credit history length, your debt, whether you’ve taken new credit, and more.
You are advised to take an unsecured personal loan as opposed to a secured one. Depending on the before-mentioned credit score, you can take a much bigger or a much smaller amount of money. The credit score also impacts the repayment terms. It is possible to take an unsecured personal loan even if you have a bad credit score. The only downside to this is that you will get much less favorable rates.
Credit Builder Loans
If you’re a first-time credit receiver, then credit builder loans are for you. What makes these loans so good is the fact that they also help you rebuild your credit score. So people with bad credit scores can take one of these loans and improve their credit score as they make payments on time. The obvious benefit to this is that you are improving your financial situation and putting yourself in a better opportunity to take out an unsecured loan.
What also separates these types of loans from the previously-mentioned ones is the fact that you take out a much smaller amount. This amount is designed to be repaid in a few months. But it’s important not to miss out on making the payments as it defeats the whole purpose.
Debt Consolidation Loans
Similar to credit builder loans, debt consolidation loans help you get out of tricky financial situations. The whole purpose of these loans is to help you consolidate multiple loans into a single one. In many cases, this type is similar to an unsecured loan as you pay less interest. If you manage to repay it sooner, you’ll avoid the interest. Debt consolidation can throw you a lifeline when suffering from multiple debts and poor investments. But if you start failing to repay the payments, then you’ll be in lots of trouble.
Wedding and Vacation Loans
Everyone wants to have a wedding and everyone wants to go on vacation. But sadly, these can be quite huge expenses. But you can take out a vacation or wedding loan to help you out when the time comes. Generally speaking, these loans fall in the “unsecured” category as you’re meant to repay the loan after X amount of years or months. Depending on how big of an amount you take, it can sometimes take you years to repay it. Taking out a wedding or vacation loan is generally not advised as you’re meant to save money for such expenses.
Whenever we find ourselves in financial trouble. we can take out a personal loan to get us the much-needed boost. But anytime you do such a thing, you need to think of how you’ll repay the money borrowed. That’s why you should always borrow only what you can repay.