There’s a lot to learn in the world of debt and loans. It can be overwhelming when you’re trying to navigate these waters without having a lot of financial experience. It’s important, however, to do some homework to understand a loan before you decide to borrow money.
Here are five types of personal loans to consider.
Unsecured Personal Loan
An unsecured loan sounds like a daunting thing. But in reality, it’s a pretty common form of debt. Unsecured personal loans are given to borrowers without the lender holding any type of collateral. Instead, the credit of the applicant alone is used to determine whether loaning the money makes sense.
Credit cards are one of the most commonly used forms of unsecured personal loan. All you really have to do is apply for a card. If your credit profile is up to snuff, you’ll likely be approved. Unsecured loans often come with a significantly higher interest rate due to the fact there’s no hard asset backing up the debt. Another reason why it’s important to check out the USDA eligibility map for guidance.
Secured Personal Loan
If you understood the previous section, you’ll likely be able to deduce the definition of a secured personal loan on its face. As you might have guessed, some form of collateral backs up secured personal loans. When you buy a car, for instance, that vehicle stands in as collateral on the loan. If you don’t pay, the lender takes the car. The same can be said about home mortgages.
This can be beneficial to the lender because it provides a strong motivation for people to pay back their loans on time. It also ensures them compensation if the bills don’t get paid.
While it might seem that as a borrower you should always try to get an unsecured personal loan (wouldn’t it be great to not pay your mortgage but still keep your house?), the reality is a bit more complex. For starters, secured loans almost always come with a lower interest rate. When you’re making a huge purchase such as a car or house, you want that rate to be as low as possible. Offering the subject of the loan as collateral in the form of a secured loan is the most efficient means of doing this. Also, good luck getting anyone to write you an unsecured mortgage or car loan.
Debt Consolidation Loan for Bad Credit
Debt consolidation loans are for people who have ended up with some financial troubles due to difficulties repaying debt. There are lots of reasons why this can happen to someone. No matter the circumstances, however, a debt consolidation loan for bad credit can be a way out of a tricky situation.
Debt consolidation loans take multiple lines of credit and roll them into one payment. This simplifies the process for many people who were otherwise struggling to keep up with a multitude of debts.
Your interest rate determines how much you’re going to actually pay over the course of a loan. A difference of just a few basis points can mean the difference between paying, or not paying thousands of dollars.
With a variable rate loan, your interest rate is often going to be on the lower end of benchmark lending rates. The downside is that the rate is variable, meaning it can change over time if the benchmark goes up. Variable-rate loans can be a good option if you expect to pay off the loan in a relatively short amount of time but can be dangerous on longer-term loans taken out when rates are at a low point.
A fixed-rate loan is just the inverse of a variable-rate loan. Your rate is your rate, and it’s not going to change unless you somehow refinance the debt.
The clear benefit to a fixed-rate loan is the fact you can precisely forecast the amount you’ll have to pay over the course of the loan. You typically want to lock in a low fixed rate when interest rates are at cyclical lows.
There are lots of different types of personal loans out there. No matter your needs, there’s likely a type of financing that can get you money upfront. Just be sure you understand the terms and conditions of the loan so you don’t end up with too much debt.