Choosing the Right Type of Personal Loan
If you are in need of a loan, the good news is that you most likely won’t have too much trouble finding a place to apply. Most cities and towns have several banks, credit unions, or local lenders that will be happy to take your application for whatever credit product you need. Also, online lenders are becoming an increasingly popular, fast and easy solution for your loan needs.
However, there are many different choices when it comes to the type of personal loan you can go with. The type you choose will depend on a number of factors. In fact, the personal loan that works for one borrower might not be ideal for the next. Below we’ve outlined the different types of personal loans available, so you can feel confident choosing the one that makes the most sense for you.
Can you get a personal loan to help pay off your debt? Find out here.
What Can I Use a Personal Loan For?
Before looking at the different types of loans, let’s examine the various things people can use personal loans for. You can basically use a loan for anything, but here are a few of the most common things people use personal loans for:
To Buy a Car
As most of us don’t have thousands of dollars lying around to spend on a car, securing a loan is a must, especially when you want a brand new vehicle. In fact, plenty of people who need cars end up using personal loans to pay for them.
Trying to decide if it’s better to lease a car or buy one? Read this.
To Pay Off Credit Cards
Credit card debt itself can be very difficult to deal with. So can the high-interest rate that accompanies it. Interest rates can make it very tough to actually get out of debt, as a large portion of your repayments is going to the interest that is accumulated and not toward paying down the principle, which is typical when you’re not making full payments. Some people will secure a personal loan to pay off their credit card debt, as the interest rate on that loan is generally less than your credit card would be.
Before you decide to cancel a credit card, check this out.
To Pay For Home Renovations
When you are remodeling or renovating your home, the costs can really add up quickly. While using cash is generally a better idea, some people simply do not have enough money on hand to cover the remodeling costs. Getting a loan can ensure your renovation goes as smoothly as possible.
Click here to learn how you can pay off your mortgage early.
To Pay Medical Bills
Depending on where you live and what sort of medical coverage or insurance you have, medical bills can be quite expensive. Instead of trying to pay for these medical expenses out of pocket by using all of your savings, or leaving them unpaid, it can often be a good idea to secure a loan to cover them.
To Pay for a Wedding
As we mentioned earlier, these are just a few of the ways that you can use a personal loan. We are not saying that these are always good reasons to get a loan, just that they are common reasons why people do.
Reasons For Getting a Personal Loan
So, what are some of the more common reasons why you might apply for a personal loan? Well, by far the most common reason is that you need some extra money. Unless you have friends or family that you can borrow money from, most people will need to take on a loan.
To Build Credit
Another reason for getting a loan, which many people might not think about, is to build credit. Having debt and paying it off responsibly (meaning on time and in full amounts) is a great way to build credit, so taking out a small loan and being sure to keep up with payments can help give your credit score a bit of a bump.
Looking for ways of building credit? You can also try credit piggybacking.
To Pay Down Debt
Some will also get what is called a “consolidation loan”, which will combine all of your loans into one combined debt. This is great for making debt repayment easier and simpler. You can often get a cheaper interest rate with consolidation loans as well.
Want to know if debt consolidation damages your credit score? Look here.
The Different Types of Personal Loans
Now that you know what people can use a personal loan for and the common reasons people use them, let’s look at the different types of personal loans you can apply for.
An unsecured loan is probably the most popular option for people looking to get a personal loan. These loans require no collateral and are therefore a little bit riskier for the lender. As a result, they may charge you a slightly higher interest rate. The interest rate you will get from an unsecured loan will depend on things like your credit score and your ability to repay the loan.
A secured loan is one that is backed by collateral. So if you don’t pay and eventually end up defaulting on your loan, the lender will be able to seize the asset that you put up for collateral. Generally, this is your car, your house, or another valuable asset you may have. While these types of loans often make it easier for certain consumers to borrow the money they need, they do come with some risk for the borrower.
Variable-rate loans have interest rates that can change over the course of the loan payment period, depending on the current market premium. These types of personal loans generally have lower rates, but come with a lot of uncertainty as you don’t always know what your payments or interest rate will be. These can be ideal if interest rates decrease in the near future.
On the contrary, fixed-rate loans come with interest rates that remain the same for the entire loan term. The rates can often be somewhat higher, but they allow you the peace of mind that comes with knowing your exact payment and interest rate every month. This type of loan makes it easier to budget for and is good for those who think interest rates will rise in the future.
Lines of Credit
A line of credit is similar to a credit card in that you have a maximum amount of credit you can use, but you have the freedom to use as much of it as you want up until that limit. The good thing about these types of loans is that you only pay interest on the money you actually use from the line of credit. Lines of credit work great when you are borrowing for ongoing or consistent expenses such as tuition, as opposed to one-time emergencies.
Want to know if you can get a home equity line of credit with bad credit? Click here.
Short Term Loans
These types of loans are made for a relatively short-term and generally come with high-interest rates. They are often used by people who need a little bit of cash over the next few days before a paycheque. Some of these can be quite predatory, so be sure to read all the terms and conditions of the loan before you sign any contracts or agree to anything.
Credit Card Cash Advances
If you have a credit card, you can take what is called a “cash advance”. This where you withdraw cash from an ATM using your credit card. Be aware, however, that this type of loan can be quite expensive, as credit cards often have specific interest rates for cash advances.
Choosing The Best Option For You
There is no best or worse type of personal loan, some are simply better options for you depending on your own unique financial requirements. As always, be sure to only take out a loan that you can afford to pay back