Types of Personal Loans: Which Option Works For You?
Need a loan? You can choose from multiple types of personal loans to find the best loan for your needs. Individual needs and circumstances can affect your choice of a personal loan. Here’s what you need to know when comparing personal loan options.
Types of Personal Loans
Unsecured loans: These loans don’t require collateral such as your home, car or other personal property. Interest rates usually are higher for unsecured loans due to the additional risk to lenders. If you default on an unsecured loan, the lender has no legal recourse such as foreclosing a home loan or repossessing your vehicle for non-payment.
Secured loans: A secured loan requires collateral that “secures” the loan. Examples of secured loans include home mortgages, home equity loans, home equity lines of credit and vehicle loans. Financial institutions may also offer secured personal loans. While secured loans have lower interest rates, the Federal Trade Commission advises consumers to be aware of risks related to lenders’ ability to take possession of collateral if a secured loan is not repaid according to loan terms.
Fixed rate personal loans
The interest rate charged for these loans remains the same throughout the loan term. Installment loans typically carry fixed rates while lines of credit usually have variable rates.
Variable rate loans
Interest rates vary and change according to a schedule included in loan terms. Personal lines of credit generally carry variable rates, but it’s important to verify whether interest rates are fixed or variable for all types of personal loans. Variable rate loans may also carry “caps” that limit how much rates can change at each adjustment period or over the life of a variable rate loan.
This type of loan is made for a specific amount and is repaid in equal periodic installments over an established repayment term. Installment loans can be secured or unsecured; examples include mortgages, home equity loans and unsecured personal loans. Installment loans usually offer fixed interest rates and are a good choice for a one-time expense such as debt consolidation, paying off medical bills or funding a home improvement project.
Lines of credit
A line of credit allows you to use credit as needed up to the maximum credit line. For example, if you have a $20,000 personal line of credit, you can use $10,000 for debt consolidation and pay interest only on the amount you use. Line of credit options include secured and unsecured options. If you don’t own a home or don’t want to borrow against your home equity, you can consider a personal line of credit. A personal line of credit is a good choice for paying recurring expenses, such as ongoing medical treatments or college tuition and expenses.
Credit cards, cash advances and balance transfers
Credit card accounts are types of personal loans repaid on a revolving basis; your payments are determined by your credit card balance and interest rate, which can be fixed or variable. In addition to using your credit card to pay for goods and services, you may also be able to take cash advances against your available credit, but be careful. Cash advances may incur higher interest rates and require payment of a cash advance fee assessed as a percentage of the amount advanced. Another way to use a credit card for a personal loan is transferring balances from high cost credit cards to a new, lower interest credit card. It’s important to compare balance transfer options as interest rates, introductory rates and balance transfer fees can vary.
Short term loans
These types of personal loans are made for a short term and carry high interest rates and fees. Unsecured short term loans are also called payday loans and cash advance loans; some lenders may also offer short term loans secured by your vehicle. These are called auto title loans and while less expensive than unsecured short term loans, you run the risk of losing your vehicle if you don’t repay the loan on time.
Types of Personal Loans: Things to Know
Choosing a personal loan from among multiple options requires research to secure your best deal. Lender fees and interest rates vary; you’ll also want to know the terms of each loan you’re considering and compare your options.
Borrow only what you need. Lenders may offer more credit than you need for a personal loan. Remember that you’ll pay interest on any amount you borrow or on any part of a credit line that you use.
Consider your reasons for taking out a personal loan. While it’s possible to borrow personal loans for many purposes, funding an exotic vacation or luxury car purchase may not be as important as using a personal loan to consolidate high cost debt or pay off uninsured medical costs.