What are the Types of Personal Loans?

Most borrowers choose fixed rates and payments with their unsecured personal loans. There are, however, a variety of additional types of personal loans, such as secured and co-signed loans. Your credit score and the amount of time you have available to repay the loan are two primary considerations determining the sort of loan that would work best for you.

Unsecured Personal Loans

Most personal loans are considered unsecured, indicating that they do not need collateral, such as your house or vehicle, to be approved. This makes them riskier for lenders, which may mean they charge a slightly higher annual percentage rate, sometimes referred to as an APR. The annual percentage rate, or APR, is the overall cost of the loan to you and includes the interest rate and any applicable fees.

Your credit score, income, and existing obligations are the primary factors determining whether or not you are accepted for an unsecured personal loan and what interest rate you will be charged. The interest rates normally run anywhere from 6% to 36%, and the repayment duration may range from two to seven years.

Secured Personal Loans

Loans are secured and backed by collateral, which the lender has the right to seize if the borrower cannot repay the loan. Mortgages, backed by the equity in your home, and automobile loans are two additional common types of secured loans.

A borrower may be able to get a loan using personal savings or another asset with certain financial institutions, such as banks and credit unions. Most of the time, online lenders that provide personal loans with security will allow you to borrow against your vehicle. Because secured loans are seen as having less of an impact on the loan's bottom line than unsecured loans, the loan rates on secured loans are often lower than those on unsecured loans.

Fixed-Rate Loans

Most personal loans have fixed rates, meaning that both your rate and your regular payments (often called installments) remain the same throughout the duration of the loan.

Fixed-rate loans are a good option for borrowers who want their monthly payments to remain the same and are worried about increasing interest rates on longer-term loans. If your interest rate is constant, you won't have to worry about the amount you have to pay each month, which makes creating a budget much simpler.

Variable-Rate Loans

Loans with variable interest rates are often linked to a benchmark rate established by the lending institution. Your loan's interest rate, your monthly payments, and the amount you will spend on interest throughout the life of the loan might go up or down depending on how the benchmark rate moves.

Loans with variable rates may have lower APRs than loans with fixed rates. They may also come with a cap that restricts the amount your interest rate may shift throughout a certain period and the whole of the loan's term.

A variable-rate loan may make sense if it has a short payback time since interest rates may climb, but it is doubtful that they will skyrocket in the near future. However, variable-rate loans are not as readily accessible as loans with fixed rates.

Debt Consolidation Loans

A debt consolidation loan will combine all of your existing obligations into a single new loan, which will result in just one payment due each month. If the loan's annual percentage rate (APR) is lower than the rates on your previous obligations, then consolidating your debts is a smart decision since you will save money on interest payments.

Co-Signed and Joint Loans

Borrowers who can't qualify for a personal loan or want a cheaper rate might consider applying for a co-signed or joint loan instead. A co-signer is someone who guarantees that the loan will be repaid if the borrower is unable to do so but who does not have access to the loan money. If one borrower on a shared loan doesn't make their payments, the other borrower is still responsible for the loan, but the other borrower may still access the money.

Your chances of being approved for a loan are improved, and you can negotiate more favorable conditions and a lower interest rate if you add a co-signer or co-borrower with good credit.

Personal Line Of Credit

Revolving credit is known as a personal line of credit, and it's more comparable to a credit card than a personal loan. You will not get a large chunk of money all at once; rather, you will be granted access to a credit line from which you can draw money on an as-needed basis. You only end up paying interest on the amount that you borrow. When you need to borrow money for recurring needs or unexpected emergencies, rather than for a single, one-time purchase, a personal line of credit is your best option.