With various kinds of personal loans available in the market today, one must do adequate research to find the right type. Lender rates, loan tenure are certain parameters to consider before zeroing on a loan.
When borrowing from a lender, make sure you don’t borrow more credit than you need for a personal loan. Remember that you have to pay interest on the amount and it’s best to keep it to an amount that you require. Another factor to consider when choosing is the reason for taking the loan. Whether it is to fund an international vacation or a luxury purchase or to pay off credit card debt, make sure the loan type suits the need.
The following are the types of personal loans available:
The biggest advantage of an unsecured loan is that it does not require collateral in any form. Due to the increased risk at the absence of collateral, interest rates are comparatively higher. There is no legal remedy for the lender such as foreclosing another loan or repossession of the collateral if the borrower defaults the loan.
A secure loan, by name, suggests that it requires collateral that makes the loan ‘secure’. Home mortgages, home loans and vehicle loans are examples of secured loans. Several banks and other financial institutions offer secured personal loans. The advantage that secured loans offer is lower interest rates as collateral is provided. The lender is allowed to take repossession of the collateral if the dues are not repaid according to that loan terms.
Fixed rate personal loans
Typically, in other types of loans, the interest rate can change yearly. With fixed rate personal loans, the interest rate remains unchanged for the entire tenure of the loan. This kind of loan can be beneficial to a borrower looking to repay the money in a short amount of time.
Variable rate loans
For this kind of loan, interest rates vary and change according to a schedule during the loan term. These loans also carry caps, limiting how much rates can change at each adjusting period.
A variable rate loan allows you to make additional repayments without penalties within the term of the loan. It also allows you to repay the loan early without incurring additional fees. These loans come as both secured and unsecured loans. Terms range from one to seven years.
A specific amount of money is borrowed through this loan which is repaid in equal periodic installments over the course of the pre-determined loan term. These loans can be either unsecured or secured, with different interest rates for each. Generally, installment loans offer a fixed interest and can be advantageous for paying off one-time expenses such as debt consolidation or paying off uninsured medical bills.
Lines of credit
A credit line allows you the unique advantage of paying interest for the amount used from the line of credit. Line of credit offers secured and unsecured options. This option is generally considered by people who don’t want to borrow money against their home equity. A personal line of credit is a good choice for a borrower who is looking to paying recurring costs such as ongoing medical treatment or college expenses.
Credit cards, cash advances and balance transfers
Credit cards are a form of personal loans which are repaid on a revolving basis. Credit card interest rates can be fixed or variable. Apart from using it to pay for goods and services, credit cards are also used to take cash advances from available credit amount. But such transactions incur high interest rates that require an advance payment. Another way that the credit card can be used as a form of personal loan is by transferring balances from high cost credit cards to a lower interest credit card. Make sure you compare your balance transfer options as interest rates, balance transfer fees and additional fees can vary.
Short term loans
Short term loans carry high interest rates and high fees. They have a short tenure. These loans are also called payday loans or cash advance loans. Some banks offer short term loans secured by your vehicle. While the secured short term loan turns out to be less expensive, you run the risk of getting your vehicle repossessed by the bank in case you are not able to pay back the loan.