Only 28% of Americans are considered financially healthy. If the average person has an emergency expense, most either don’t have enough money in savings and/or don’t earn enough money to cover that cost.
But more people have another financing option: loans.
Loans can help cover the cost of emergency expenses or even specific expenses, such as a car. These loans are called personal loans and there are many types of loans out there. You pay back the loan over a certain period of time, usually with added interest rates.
But navigating the personal loan market can be difficult. Here are the best types of personal loans and your options.
What Are Personal Loans?
When you take out a personal loan, a financial institution is letting you borrow a certain amount of money. You pay this loan back in monthly installment payments, usually over a period of time. Personal loans also come with an interest rate—anywhere between 6% and 34%.
Most personal loans are unsecured (which we will go over more later), but there are personal loan options that are backed by collateral. While there are loans available for specific purchases, you can borrow a personal loan for any reason.
Why choose a personal loan over a credit card? Personal loans usually come with higher fund amounts and lower interest rates than credit cards.
Your lender will determine your eligibility by looking at your credit score (but some loans accept those with bad credit scores or don’t check your credit score), your repayment history, and your income. Secured loans are the easiest to qualify for, though you will need to put down collateral.
Many financial institutions offer personal loans. These include banks, credit unions, and online lenders.
Before signing up for a loan, it’s recommended you conduct plenty of research. Look at a few different lenders and compare their APR rates, fees, and eligibility requirements. You should also fill out a few different applications and see how many lenders accept you—you only receive the funds when you agree to their contract.
How Do Personal Loans Work?
With personal loans, you borrow a fixed amount of money and pay it back in monthly payments. The payments are usually fixed and every personal loan has a payback period—usually lasting between 12 and 84 months.
Lenders work with your credit score, your repayment history, and your salary. You may have to put down collateral, depending on the type of loan you’re taking out. Your lender will approve your loan amount based on these factors and how much you need to borrow.
What if you need more money after you pay off the loan? You’ll have to apply for a new loan. Your account closes after you pay off the loan.
Secured vs. Unsecured Personal Loans
When searching for a personal loan, you have the option to choose a secured or an unsecured loan.
A secured loan has collateral, or something that’s connected to the loan. Title loans are a perfect example, which we will discuss later in the article.
If you opt for a title loan, your car title is connected to the loan. In the event you can’t pay off your loan, your lender can take your car.
An unsecured loan has no collateral. Most personal loans are unsecured, but there are specialty loans that do require collateral.
Fixed vs. Variable Rate Personal Loans
Your personal loan can have two different types of APR rates: fixed or variable. A fixed interest rate won’t change. Most personal loans have fixed interest rates, though variable rates are also an option.
Variable rates can increase or decrease throughout the life of your loan, depending on the market. All variable rates have a cap where the rate can’t go past.
Are There Loans for Bad Credit?
Your credit score impacts your creditworthiness. Low credit scores tell lenders you’re a risky borrower. This doesn’t mean you won’t qualify for a loan. You’ll just have to find the right lender and apply to a loan that works with your financial state.
Two good bad credit loan options include no credit check installment loans and payday loans. Installment loans have fixed monthly payment amounts and some lenders won’t check your credit score. Payday loans only let you borrow the amount you’ll receive on your next paycheck.
Keep in mind, both loan options could have high interest rates, strict repayment periods, and additional fees.
The lender you choose also impacts your loan eligibility. For example, you’ll have an easier time qualifying for a loan from a credit union than a traditional bank.
What Are the Different Types of Personal Loans?
There are lots of different loans available. Before you sign up for a loan, take a look at your options and know which is the best loan for you.
Installment Loans
We briefly described installment loans in the previous section. But since installment loans are so common, it’s essential to devote a whole section to this loan type.
With installment loans, you borrow a set amount of money and pay them back in monthly installments. You and the lender agree on the borrow amount and the time you have to pay back the loan.
Installment loans are diverse loans and could be used to describe many loan types, including mortgages and auto loans.
Payday Loans
We also mentioned payday loans, but it’s important that we describe these loans in detail.
With payday loans, you borrow the average amount you receive on your normal paychecks.
When you apply for a payday loan, you include paystubs for your last few paychecks. Your lender may also look at your financial history and your credit score (though there are lenders who won’t look at your credit score).
Payday loans have short-term payback periods and usually come with high interest rates.
Title Loan
If you’re looking for a secured loan and own your car, you can easily get a title loan. With title loans, you borrow your loan against your car. While these loans are great if you need financing, they usually come with high fees—and you may lose your car if you can’t pay off the loan.
Consolidation Loans
Do you have several loans you’re paying off? Are you in credit card debt? You can take a consolidation loan to help pay them all off.
Consolidation loans are beneficial because they usually come with lower interest rates and they simplify the loan pay-off process. They often come with longer terms, lowering your monthly payments. There are also specialized consolidation loans, such as student consolidation loans.
While they’re not for everyone, consolidation loans can help you take control of your debt and achieve better financial health.
USDA and Mortgage Loans
There are several mortgage loan options, but one of the most affordable is the USDA loan program. If you plan on buying a home in a rural area, these loans are convenient because you don’t need to put a down payment on the home.
These loans are convenient for those who don’t have money for a down payment, don’t qualify for a traditional mortgage, and they even offer low interest rates. Qualifying for a USDA loan is easy and they’re very accessible.
Auto Loans
Many people decide to take out an auto loan when they buy a car. With auto loans, you put a down payment on a car and pay off the rest in fixed monthly payments with added interest.
Many factors impact these payments, including the cost of the car, whether it’s new or used, the repayment period length, your credit score, your repayment history, and the interest rates you qualify for.
Student Loans
Student loans are financing meant to help a student pay for college. Student loans cover expenses such as tuition, books, school supplies, and even living expenses.
There are downsides of student loans—as of 2020, the country’s student loan debt is now at almost $1.6 trillion. Student loans cause students, often young, to be in serious debt and it can take years to pay off the loan.
But there are benefits to taking out a student loan. They offer convenient financing options, usually come with low interest rates, and students usually don’t pay off these loans until they graduate college.
There are also more student loan options now than ever. These include:
- Federally-funded loans
- Private loans
- Loans for students with financial needs
In addition, some loans include borrower protection, providing assistance for students in severe debt.
There are many options where students can get their student loans. While banks usually require a good credit score and a specific salary (or a co-signer), federal loans usually have fewer restrictions.
Now That You Know the Different Types of Personal Loans, Choose a Loan Today
If you have an emergency expense or a specific expense you can’t afford, a personal loan will come in handy. There are many types of personal loans. Use this guide to best loan!
If you’re looking for lenders, you can compare lenders and their rates using our helpful tool.
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