Personal loans are a form of loan that does not require collateral. They can be used for various purposes, such as settling credit card debt. The loan amount is determined by the lender and is given to the borrower as a single payment once the loan is approved. The borrower then repays the loan, along with interest, in monthly installments according to the terms of the loan.
What can personal loans do?
- Using a personal loan can consolidate multiple credit card debts into a single payment, potentially at a lower interest rate.
- Personal loans are unsecured and typically have fixed interest rates throughout the loan term.
- Consolidating credit card debt into a personal loan can simplify financial management and reduce total interest paid.
- Applying for a personal loan involves a hard credit inquiry, which might temporarily lower your credit score.
- Personal loans can be obtained from various sources, including online lenders, banks, and credit unions.
What are the different types of loans?
While there are various types of loans, the ones mentioned are the most common. Each type of loan varies in features such as duration and interest rates. The figures in the table provide typical values for each loan type. Except for the aforementioned personal loan, there are other types of loans such as:
- Debt consolidation loan
- Mortgage
- Home equity loan
- Student loan
- Auto loan
- Small business loan
- Credit builder loan
- Payday loan
What to consider with different types of loans?
Regardless of the type of loan, acquiring new debt can feel daunting. There are numerous aspects to think about before committing to the loan. Neglecting certain details may result in higher costs in the future.
Credit scores: Before you apply for a loan, it's crucial to review your credit scores and reports. Your credit scores, such as FICO Score and VantageScore, will determine which lenders you can qualify with and the interest rates you may be offered.
Loan purpose: When considering a loan with a flexible purpose, it is important to inform the lender about how you intend to use the money, as some lenders have restrictions on the use of funds. For specific loans such as mortgages and auto loans, you may need to show the asset you plan to purchase with the loan.
APRs: APRs represent the total cost of borrowing, which includes interest rates and fees. Having a good credit score and a solid credit history can help you qualify for lower APRs, ultimately saving you money on the loan.
Repayment terms: The time given to repay a loan affects the APRs you are charged. Longer loan terms usually come with higher APRs but lower monthly payments, while shorter terms often have lower APRs but higher monthly payments. Your credit score also plays a role in determining your APR and monthly payments.
Borrowing limits: The amount you can borrow is determined by factors such as your income, the purpose of the loan, and your credit history. It's important to note that if you have a poor credit score, it may be difficult to qualify for a large loan.
Secured versus unsecured loans: Secured and unsecured loans are important to differentiate between, as they can affect your APR and the consequences of failing to repay a loan. Secured loans typically have lower APRs because they are less risky for lenders, thanks to the collateral involved. However, if you fail to repay a secured loan, the lender can take possession of collateral, which is not the case with unsecured loans.