Do you know that there are more than 21 million outstanding personal loans in just the U.S. alone? With that many, you may not be surprised to learn that there is more than one type of personal loan available. Read on to learn about the different types and which is the best personal loan for you.
What Are the Main Types of Personal Loans?
There are two types of personal loans:
These loans are offered with two forms of interest rates:
- Adjustable-rate (also referred to as the variable rate)
Which one you qualify for will depend on several factors. You should also remember that different financial institutions have their own requirements that you must meet to be eligible. To determine which personal loan option is best for you, check out Plenti Personal Loan.
What is the Difference Between Unsecured and Secured Personal Loans?
Unsecured personal loans are the most common type. They do not require any type of collateral. The unsecured option will have stiffer requirements and failure to make payments could result in the loan going into collections.
Secured loans are easier to obtain and they often come with lower interest rates. The downside is that if you fail to make payments, the lending institution can take possession of the collateral assigned to the loan. Some examples of collateral include a vehicle, home, or savings account.
What is the Difference Between a Personal Loan with a Fixed-Rate and One with an Adjustable Rate?
The fixed-rate option is the most common personal loan. With this option, the interest rate remains the same until the loan is paid off. This allows you to know the total amount you will have to repay before you take the loan.
Adjustable rate personal loans have interest rates that may change over the life of the loan. The advantage of these loans is that the interest rate is typically low at the beginning. If you are able to repay a loan quickly, this type may be preferable.
What Options Are Available with the Different Types of Personal Loans?
If you are starting out and don’t have an established credit history, you may need someone to cosign. A consignee is an individual who agrees to take on the loan payments if you are unable to do so. An example of this is a student taking out a loan for school and having a parent as a cosigner.
If you have multiple debt payments, you may qualify for a personal loan that acts as a form of debt consolidation. This type of loan combines the multiple debt payments into one, which allows you to make just a single payment. Typically, this option has a lower interest rate than non-consolidated loans. A recent college graduate who has several student loans may consider this option.
Why Take Out a Personal Loan?
Personal loans, especially the secured option, are flexible and can be used for any purchases. Other loan types, such as home and auto loans, can only be applied to specific purchases. Some loan options, such as payday loans, have much higher interest rates and can become difficult to pay off.
As opposed to making a one-time cash payment, a personal loan allows you to pay smaller amounts over time. Personal loans are also advantageous to credit cards due to lower interest rates and the that they don’t constrain you with a spending limit.
Who Offers Personal Loans?
Many financial institutions offer both types of personal loans. These institutions include:
- Credit unions
- Consumer finance companies
- Online lending companies
Always do your research when reviewing the lending company, as some have been found to be misleading and fraudulent by the Federal Trade Commission. Not all banks offer unsecured personal loans but the ones which do may offer lower interest rates for existing customers. Reputable online unsecured personal loan providers may offer amenities, such as fast funding, that brick and mortar institutions do not.
What Fees Are Associated With Personal Loans?
You should consider the fees that are applied to both secured and unsecured personal loans. Many of these fees are applied to both types and some are based on a percentage of the loan amount.
These fees include:
- Application fee
- Origination fee
- Late payment fee
- Repayment penalty fee
- Payment protection
It is important to review the terms of a prospective personal loan agreement to see which fees apply. An example is a repayment fee on a personal loan with an adjustable-rate. This fee exists so that if the loan is paid off quickly while the interest rate is low, the lender can recoup some of the money they lost.
What Type of Credit Score Do You Need?
Unsecured personal loans typically require a higher credit score than their secured counterparts. If your credit score is 670 or above, you should be able to qualify for an unsecured personal loan (time.com). If your credit score is below 670, a secured loan may be your only option of the two types, unless you get a cosigner.
Choosing the Best Personal Loan for You
While there are only two main types of personal loans, you should consider the different interest rate options, the fees accessed and the amount that you wish to apply for. You may want to shop around with different lenders to ensure that you are working with the best loan provider for your situation. If you found this helpful, check out our other blog posts.