Types of personal loans and how they work

different types of personal loans

Each type of personal loan has its pros and cons. Your unique situation will help determine what works best for you.

secured personal loan

A secured loan, as the name suggests, guarantees the lender’s loan through collateral. If you default on your loan payments, the terms of a secured loan allow the lender to take collateral as payment.

A secured personal loan requires the borrower to risk their assets as collateral, but this way the borrower can access lower interest rates. Also, with a secured personal loan, a borrower with poor credit can’t otherwise borrow and take out a loan.

unsecured personal loan

unsecured personal loan More typical than safe. Borrowers with good credit (usually 600 and above) have access to unsecured personal loans. Your credit score determines how much lenders will lend you. Additionally, the higher your credit score, the lower the interest you will get from the lender. However, unsecured personal loans rarely offer as low interest rates as secured loans.

fixed and variable rate loans

There are two types of interest rates for personal loans: fixed interest rates and variable interest rates.

Fixed rate loans do not change interest rates. A fixed rate allows borrowers to always make the same monthly payment and not have to worry about a floating rate suddenly raising their payments. However, fixed interest rates are not as low as variable interest rates.

Variable rate loans (sometimes called variable rate loans) often offer borrowers a lower interest rate introduction period than fixed rate loans. After the first period ends, the interest rate is adjusted and changed based on larger lending market developments. Preset upper and lower bounds determine how much the interest rate can increase or decrease.

Variable rate loans are excellent for borrowers who can pay off the loan before the introductory rate expires. However, borrowers who plan to hold the loan debt for the entire term may find a fixed rate loan more advantageous as it is immune to rising interest rates.

debt consolidation loan

debt consolidation Loans are a popular option for borrowers facing multiple debilitating debts. Ideally, a debt consolidation loan would allow him to consolidate all his debts into one account and pay less interest than the original debt.

For example, it often helps with credit card debt and student loans. Making affordable monthly payments can help you deal with your debt efficiently and avoid paying multiple debts at steep interest rates.

However, debt consolidation loans are only lucrative if they save you money. Therefore, it is a good idea to check with your lender whether the interest rate is fixed or variable and what your monthly payments will be. Additionally, debt consolidation loans, like most other loans, come with an origination fee, so taking out a loan without doing your homework can be a costly mistake.

Leave a Comment