If you’re thinking about taking out a personal loan, you might be wondering what your options are. There are different types of personal loans that an individual can go for, each with its own set of pros and cons. For example, if you want a loan to help you consolidate debt, pay for a significant purchase, or cover some unexpected expenses, there’s one that can fit your needs.
Here are the different types of personal loans, so you can decide which one is right for you.
How Does a Personal Loan Work?
As the name suggests, an individual takes it out for personal use. Personal loans are a type of installment credit. Unlike a credit card, a personal loan provides borrowers with a one-time cash payment. Borrowers then pay back the loan amount plus interest in regular monthly installments over the loan’s term.
Personal loans are typically for smaller amounts of money than you would get with a mortgage or car loan. The maximum amount you can borrow with a personal loan varies with the lender. On the other hand, the interest rate on personal loans varies depending on the lender, your credit score, and the amount of money you’re borrowing. But personal loans typically have higher interest rates than credit cards.
There are two main types of personal loans: secured and unsecured.
Unsecured Personal Loans
According to Lantern by SoFi, an unsecured personal loan is a personal loan without collateral. This type of loan is an excellent option if you don’t have any assets to use as collateral or you don’t want to risk losing them.
The downside of unsecured personal loans is that they come with higher interest rates because there’s a greater risk for the lender if they don’t get their money back.
If you can’t make your monthly payments, the lender can’t repossess your car or foreclose on your house to get their money back.
Unsecured personal loans are available from various sources, including banks, credit unions, and online lenders.
Secured Personal Loans
It is a personal loan that’s backed by collateral. This type of loan is an ideal option if you need a large amount of money and have assets that you can use as collateral.
The downside of secured personal loans is that the lender can take your assets if you can’t make your monthly payments.
Personal loans can also be fixed-rate or adjustable-rate.
Fixed-rate Personal Loans
A fixed-rate personal loan is a personal loan with a fixed interest rate. This type of loan is an excellent option if you want to know exactly what your monthly payments will be, and you don’t want the interest rate to change during the life of the loan.
Adjustable-rate Personal Loans
An adjustable-rate personal loan is a personal loan with an adjustable interest rate. It’s ideal for those who want the flexibility to choose how much your monthly payments will be.
Overall, personal loans are a great way to get access to cash when you need it. Never use the money from a personal loan frivolously. Personal loans should only be used for essential expenses that you can afford to pay back over time. So do your research and compare interest rates before deciding which personal loan is suitable.
