When one is in urgent financial need, taking personal loans is tempting. But what kind of loans should you take? Despite the name, the credit offer comes in various forms, offers, and models. Hence, you should consider and think further when taking one for your financial funding to avoid problems in the future.
In this article, you will find several types of personal debt or funding that you can find. Some include secured, unsecured, personal lines of credit, debt consolidation loans, and so on. Every type has its characteristics with dos and don’ts. Here are the details of the promising loans and what you should avoid.
Types Of Loans to Consider
1. Unsecured Loan
An unsecured loan is also called a signature loan. It is one of the most common personal credits you can take without many hassles. The main highlight is you don’t need collateral to get approved. However, most lenders will make a consideration based on your credit score, income, and outstanding debt load.
Is it a good option? In many cases, the unsecured loan is a good option for quick funding. It also does not need any collateral, which means you won’t risk losing any assets. However, you will need good or excellent credit to get approved with the best loan terms. Some lenders have to consider your application.
Every qualification will differ from one lender to another. You will need a good DTI or Debt Income rate, around 35-43%. Stretching the rate will make your loan request harder to accept. At some point, lenders can also consider your employment and education history just to approve your appeal.
Is the unsecured personal loan not at risk? While it is pretty easy to appeal, you still need to pay it properly. You won’t lose assets, but your credit score will get damaged. At some point, not paying regularly will cause you a higher fee, interest, fine, and legal proceedings.
2. Secured Loan
If you have a hard time getting approval, try the secured loans. It is the opposite of the unsecured one, in which now you need to provide collateral for approval. The point of this loan is the different types of collateral. Many won’t take a house or car as the backing but prefer using a certificate of deposit (CD) or savings accounts for approval.
Is this a good option for emergency funding? Yes, especially if you have a low credit score. At least the collateral helps you secure the loan’s approval. It works similarly to auto loans and mortgages which is good for people who need extra money. But you risk losing your assets or cash once you fail to fulfill the payments.
The secured money funding gives less risk to the lender. The best benefit of this option is that lenders tend to offer lower interest rates than the unsecured one. But it will depend on the collateral you are using for the loan. The lender will have legal access to your collateral asset. They can seize it to offset what you owe to the lender.
3. Debt Consolidation Loan
This is one of the uses of the personal credits. In easy terms, you can say that the loan you take is meant to pay off multiple debts. The debts can include credit cards, medical bills, or anything else. When you take this type of loan, it means you will use the new funding to close or pay other debts you own.
The mechanism is that the loans will combine all of the multiple loans you have into a single payment. It will help lower the interest rates, which makes it easier to pay the outstanding balances faster. At the end of the day, you still have to pay in a longer term. But at least you got the lower interest for all the debt you have, such as medical bills, credit cards, or anything else.
Another benefit of using this consolidating loan is you can combine everything as one credit. With that, you will have peace of mind as you only need to make one monthly payment with a single due date to remember. Is it a good loan to take? Yes, it is. For people with multiple loans, adding personal loans as consolidations will also help maintain your credit score.
All in all, by combining everything into one, the lenders can lower your interest or the payments. It indicates that you will have extra money for different needs. However, it also has a catch of its payment and the amount of money. As you borrow more money, you extend the repayment period which can lead to higher total interest you will pay at the end.
4. Joint Or Co-signed Loan
Are there more options when you are not approved for the loan? Other than the collateral, you can also request a loan with a co-signer. It is called a co-signed loan, in which you will take someone creditworthy as a co-signer. The co-signer will be your guarantor or someone who shares equal responsibility for the loan you have.
In other words, you need someone who will help you pay or take over your repayment terms. However, they don’t have access to the borrowed funds. The key is to bring someone who can support the cost of your loan on their income alone. Who are they? It can be anyone from family, parents, mentors, advisors, close family friends, spouses, or legal guardians.
However, many lenders may also have different co-signer requirements. Some of the basic requirements are good to excellent credit. Your backer should have strong credit to take care of your loan. After that, they also need to have a steady income to cover the monthly payments. Then be sure to request an acceptable debt-to-income ratio.
What if they cannot pay the loan? When you take this type of loan, it means both of you will share the same responsibilities. Failure to pay the terms will decrease your credit score. So, be sure you have the right person as a co-signer. How about joint loans? It is similar to the co-signed, but in this one both parties can share the loan fund.
As the name implies, it is a joint loan where both you as the borrower and the co-borrower can access the loan funds. You can share the money and both have the same responsibilities to pay it back. Again, the co-borrower will need a good credit score and steady income to ensure your request is approved.
5. Personal Line Of Credit
This one is unique, which is a revolving credit. To make it clear, the money is drawn and repaid similar to a credit card. This is a good option as you can borrow as needed and pay lower interest. The money does not come in a lump sum of cash, but it is a fund given from the credit line. Most of the time, you can get this option from a bank.
If you are looking for a flexible amount of money, this is a good option. You can get it easily and make a small to a large ongoing expense as you need. The way it works is similar to a credit card. It gives you funding for your outcome and has a better rate than using a credit card. That is why people use it for renovation, ongoing emergencies, or protection.
However, there is a downside to this personal line of credit. Compared to credit cards, this option does not have an interest-free grace period. So, there is no leeway in the payment. All the payments will be charged with interest. How much do you need to pay? Typically, this loan has variable rates but you can secure it by banking assets or find the unsecured one with smaller banks.
6. Buy Now, Pay Later
Online banking hype brings out various benefits, including the new term of Buy Now, pay later loan (BNPL). As the name says, it covers the initial purchase upfront. You or the borrower do not have to pay the total purchase. Instead, the balance will be divided and payable in equal installments. Most of the time it should be paid within six weeks of the purchase date.
Compared to many personal loans, this option is mostly offered through mobile apps, mobile banking, or online marketplace. Most lenders are online banking that will review your bank activity and conduct a soft credit check. The good point is, most likely it won’t impact your credit score. You can get approval for the pay later even with a perfect credit score.
But is it a wise loan? In one way, the ease of access and use make this loan good for emergency transactions. However, there are chances of higher interest and penalties when failure in payment. So, be careful when using the pay later. Don’t overspend or take out more BNPL. It can harm your credit score once you make late payments, despite all your on-time payments.
7. Variable Rate Loans
There is also one called a variable rate loan, which highlights the varying interest rates that can fluctuate based on market conditions. This is an okay loan to get, and most of the time it comes with a lower annual percentage rate (APR). However, the rate can fluctuate so budgeting can be more challenging. If you want to take it, consider a short-term loan.
8. Fixed Rate Loans
No change in interest can be good or bad, depending on the situation. You will pay the same monthly payment no matter the duration of your loan. With that in mind, the interest and principal are paid at the same rate. It is easy to budget and mostly beneficial. But be sure you get the best offer with low interest.
9. Cash Advance Apps
Be careful with cash advance apps that allow you to borrow small amounts. The personal loan amount can add up with crazy interest. It does not take any credit information as a qualification. Instead, it requires access to your bank account and transaction history. The catch is, the lender will take the payment directly from your bank account on your payday.
10. Credit Card Cash Advance
This loan source is your bank and ATM which provides a short-term cash loan. Is it good? Yes. It is easy and quick, but it is more expensive. Most of the time, credit card cash will have a higher rate compared to those who use the ATM or credit card for purchases. You should pay additional advance fees that can take around 5-10% as much as the amount borrowed.
11. Pawn Shop Loans
Pawnshop is a common option to get easy cash. You can borrow money against an asset, such as electronics, jewelry, or whatever the pawnshop takes. It is part of the secured loan, but the catch is the lender can sell your asset once you fail to pay. It won’t damage your credit card, but the rates can go 200% APR. Be careful with this option.
12. Title Loans
Similar to pawn shops, title loans work with vehicles as collateral. You can borrow small to big amounts of money with this loan, but you can lose your car when you fail to pay. It is considered a short-term loan, ranging from one to six months. It is easy, but the interest can go as much as triple the money you borrowed.
13. Payday Loans
The last option is the unsecured type of payday loan. It is known as a short-term, risky, and high-interest loan. As the name says, the payment will be taken from your next payday. That is why there is a chance of losing more money than expected. Most problems occur when failing to pay. To cover the expenses, they will take additional loans.
So, which one should you take? Some personal loans are good emergency funding. They can offer great interest and tempting payment offers. But be careful with several quick-to-grab money as they may have higher interest, fees, and penalties. Be sure you have the proper one fitting for your financial situation.
