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What Are the Main Types of Personal Loans?

Unfortunately, it’s not uncommon for people to find themselves in situations where they need money and don’t have it. Finances are tough for everyone these days, so it’s hard to have cash on hand for unexpected purchases. Unfortunately, the average American has over $90,000 in debt.

If you find yourself in this kind of situation and have money problems, you may need to get a loan.

There are many types of personal loans you must consider if you want to get the best bang for your buck. Keep reading to learn about your personal loan options and why each makes sense.

Unsecured Loan

An unsecured loan is the most common type of loan you’ll get. These loans aren’t backed by any collateral. The lender is taking a risk that you’ll pay back the loan, so there won’t be anything required from you.

As a result, your loan may have a higher interest rate. Additionally, you may need a higher credit score to prove that you aren’t at risk of not paying what you owe. Individuals with failing credit ratings can consider taking bad credit loans, though fees cost higher than normal ones.

You can expect these loan terms to last between two and seven years.

Secured Loan

Unlike an unsecured loan, where you don’t have any collateral, you’ll need to put up collateral for a secured loan. You’ll get this type of loan if you don’t have a great credit score or lending history. This is because there isn’t much proof that you’ll pay your loan without problems.

In many cases, these loans are secured with property like your car. Your asset value must be large enough to cover the loan’s value. If you fail to pay your loan, your lender can seize your asset and sell it to recoup its money.

However, these loans also carry less interest than unsecured loans. Since an asset secures your loan, they’re less risky to a lender.

Debt Consolidation Loan

Do you have a lot of other debt on credit cards and from other sources? If so, you may have trouble keeping track of everything and paying things off. You have varying interest rates and several payments to make every month.

You can make things easier by getting a debt consolidation loan. These loans are outstanding for paying off all your current debt and combining it into a single loan.

The good thing about this is that it can likely reduce your interest rate. If much of your debt comes from credit cards, you can drastically reduce your monthly payment. That leads to less money paid long-term and putting yourself in a better financial situation.

Fixed-Rate Loan

A fixed-rate loan is one of the most common types of loans you’ll see. You’ll get them with unsecured, secured, and other types of loans.

A fixed-rate loan has a constant interest rate. As time goes on, you’ll pay the same monthly amount because your interest rate won’t change with the market. That makes it an excellent loan for people who want something stable and don’t like surprises.

You can sometimes get started quickly with these types of loans, so see what’s out there and start applying.

Variable-Rate Loan

Unlike a fixed-rate loan, the interest rate you get with a variable-rate loan can change over the life of the loan. That makes these loans harder to budget for in the future.

On the other hand, you may end up getting a lower rate with this type of loan. If you can pay this loan off ahead of the loan term before the lender can raise your rate, you may save money.

The good news is that lenders can’t usually change your rate immediately. There’s a period they must wait before they make changes, so you have some time before you need to pay more money.

Line of Credit

A line of credit operates much like a credit card. You get a set amount of money you can draw from for whatever you want.

However, you don’t get a card to use your line of credit. Whenever you need cash, you draw from your line of credit and get your money deposited into your bank account. From there, you can use it as you wish.

This is great if you have unpredictable expenses and don’t want to borrow much money at once. But you may pay more interest on that money instead of getting a lower rate.

Co-Signed Loan

Unfortunately, you won’t always be able to get a loan with your credit history. Even if you don’t have any outstanding debt or are in an excellent financial situation, a lender’s processes may put you at high risk and not give you a loan.

That’s where a co-signed loan helps. A co-signed loan is one where another person signs with you on a loan. They are liable for payments if you end up not paying.

Even better, you usually get a lower interest rate if someone signs a loan with you.

Buy Now Pay Later

A buy now pay later loan is a type of loan that lets you split an online purchase into smaller payments. It’s similar to layaway, where you pay the cost of something over time.

These payments can be split weekly, biweekly, and monthly. The lender will perform a soft credit check, which doesn’t impact your credit, and will usually offer the loan. You can sometimes get by without interest payments if you have excellent credit.

Now You know the Types of Personal Loans

You’re making a big decision when you get a personal loan. You’re putting yourself into debt for many years, so it’s a decision you can’t take lightly.

Finding the right personal loan for your needs is critical if you want better terms and avoid paying more than necessary. Now that you know the types of personal loans available, you have what you need to make a more informed decision.

Do you want to learn more information that will help you learn about other financial issues? Check out the blog to find more finance tips.

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