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If you’re looking for a personal loan, it’s a good idea to explore all different types of personal loans before picking one that’s right for you. Choosing the wrong type of loan could cost you more in interest, monthly payments, or total loan costs.
To help you decide, here are the pros and cons of all the different types of loans:
- Unsecured loans
- Secured loans
- Revolving credit
- Installment loans
- Fixed-rate loans
- Variable-rate loans
- Cosigned loans
- Payday loans
Most personal loans and small business loans are unsecured loans. Unsecured means that you’re borrowing money without putting anything up as collateral to “secure” the loan. These loans usually require a higher credit score to prove your creditworthiness.
- Manageable payments: You’ll get one lump sum that you pay back in installments over a set amount of months. Some lenders might even allow you to set a reasonable repayment amount based on your income and interest rate. But compare personal loan lenders before you make a decision, so you can find the right terms for your situation.
- Use the loan for whatever you want: You can typically take out a personal loan for whatever you need it for like home improvement or debt consolidation. A personal loan is exactly that: personal. It might be for debt consolidation, paying for a wedding, or covering old medical bills. But keep in mind that sometimes when you take out the loan for a specific purpose, some lenders might treat it differently. For example, if you take out a loan for debt consolidation, many lenders might require that you pay down your credit card debt by disbursing the funds directly to the current debt owner instead of giving you the money.
- Good credit score required: Most personal loans require a decent credit score to qualify. The lower your score, the less likely you are to qualify and if you do, the higher your interest rate will be.
- Steady income: You’ll need to prove you can afford to pay the loan back. If you don’t have a steady job with a reliable income, you may not get approved for a loan.
An unsecured personal loan is good for anyone who needs to cover expenses, bills, debt, or other costs they can’t afford to otherwise. It’s best for anyone with a good credit score who can prove they’ll pay it back every month.
See More: Unsecured Personal Loans
Secured personal loans are loans that need collateral — like your home or vehicle — to “secure” or take out the loan. If you default on your loan, the lender can seize the property you put up as collateral. Most personal loans are unsecured, but a home loan or car loan is a type of secured loan.
- Easier to get: Because you’re using something as collateral, secured loans are easier to take out for people with lower credit scores.
- Lower interest rate: Since there’s collateral, the lender views you as a less risky borrower, so interest rates tend to be lower on secured loans
- Property can get seized: If you don’t make on-time payments, your collateral can get taken away.
- Can be harder to find: Not all banks or lenders offer secured loans, so sometimes they can be a bit harder to find.
A secured loan is great for someone who doesn’t have an ideal credit score for a loan but needs one anyway. If you don’t have a high credit score, consider a secured loan to prove you can make payments on time every month.
Check Out: Companies Offering the Best Personal Loans
A revolving line of credit gives you access to money that you can borrow up to your credit limit. You’ll have a minimum payment due every month or you can pay off your balance in full. If you carry a balance, you most likely will have to pay interest on top of that amount. Revolving credit comes in the form of credit cards, a personal line of credit, or a home equity line of credit (HELOC).
- Manage your cash flow: If you’ve got bills that are due, but don’t get paid for a few weeks, revolving credit can help you pay those bills. A revolving line of credit can tide you over so you don’t fall behind on payments.
- Reward potential: Many credit cards offer incentives for use, like cash back, points, or other rewards.
- Monthly payment varies: What you owe every month depends on what you borrow. This amount can fluctuate based on how you use your revolving credit.
- Higher interest rates: Revolving credit, especially credit cards, tend to have the highest interest rates. So be sure you can pay off your balance in full each month or you’ll be stuck paying lots of money in interest.
Revolving credit is great for people who can pay back what they’ve spent in full every month to avoid paying a lot in interest. If you have great credit, you could qualify for a lower interest rate in case you do carry a balance over from month to month.
Learn More: Home Equity Loan vs. Line of Credit
Installment loans are loans that have a certain amount of payments and when you pay them back, your loan is paid in full. This is the opposite of revolving credit, where you can take money out and pay it back over the course of a few months or years, depending on your contract. Loans that have end dates are installment loans — like car loans, student loans, and personal loans.
- Monthly payment stays the same: If your installment loan has a fixed interest rate, your loan payment will be the same every month. Your budget won’t rise and fall based on your payments, which is helpful if you don’t have a lot of wiggle room for fluctuation.
- Stuck with the loan amount you borrow: Installment loans don’t allow you to go back and take out more in case you need it. If you end up needing to adjust your amount to borrow, you shouldn’t look into installment loans. Otherwise, you may need to take out another loan.
Having a set amount you need to borrow and pay back makes installment loans perfect for someone who knows exactly how much they need and how much they can afford.
Learn More: What Is an Installment Loan?
A fixed interest rate is a rate that doesn’t change over the life of the loan. Many installment loans offer this (like personal loans, student loans, and car loans).
- Interest rate never changes: A fixed interest rate means your monthly payments won’t change over the life of the loan. This can give you peace of mind that payments won’t change, so you can count on paying the same amount every month.
- Potentially higher payments: Fixed interest rates tend to be a little higher than variable interest rates. While a high credit score can get you lower interest rates, a fixed interest rate can still mean higher payments compared to variable interest rates.
A fixed-rate loan is best for people who need to know exactly how much they’ll pay each month. If you can afford the payments, but only have a certain amount you can put toward them every month, a fixed-rate loan might be good for you.
A variable interest rate is an interest rate has the potential to fluctuate based on an index rate. If the index rate goes up, so does your interest rate. But it can also go down, giving you a lower interest rate. Student loan refinancing can offer variable interest rates, along with credit cards.
- Potentially lower interest rate: Variable interest rates tend to be lower than fixed rates, which means you could pay less in interest over the life of your loan.
- Uncertainty of rising rates: While having a low interest rate sounds enticing, your rate could also rise, causing you to pay more in interest or even making your monthly payment higher.
If you plan on having a loan for the short-term (just a couple of years), a variable interest rate could work for you since it won’t have much time to fluctuate. But if you’re looking for a long-term loan (like over the course of the next decade), a variable interest loan might not be best.
Learn More: Fixed vs. Variable Interest Rate Loans
When you apply for a loan, you usually need a good credit score and income to prove you’re a reliable candidate for a loan. If you don’t have a strong credit history, you might need to find someone else who does. This is where a cosigner comes in. A cosigner is someone who can vouch for your creditworthiness.
- Easier to qualify: A cosigner’s credit score can secure you a loan when you wouldn’t otherwise qualify.
- Lower interest rate: Whether you need a cosigner to qualify or not, getting one can secure you a lower interest rate if they have better credit than you.
- Both of you are responsible: While paying your loan on time can boost your credit (and theirs), not paying it back on time could cause your credit score — and theirs — to drop.
If you don’t have awesome credit to qualify for the lowest interest loan available, a cosigner can help get you the loan you need. Plus, getting a cosigner can be a good idea even if you don’t need one since that could mean a lower interest rate.
Check Out: Lenders That Accept Cosigners for Personal Loans
Payday loans are short-term loans usually up to $500 to cover expenses until your next payday. These loan terms are typically only two to four weeks.
- No credit check required: Many payday loan lenders skip credit checks, which sounds enticing if you don’t have good credit and need money fast.
- High fees: Payday loans tend to have exorbitant interest rates and fees, which could hurt your chances of paying it off on time in full. You should be cautious when pursuing payday loans.
- Ongoing debt: Not paying your loan off in full when it’s due causes your loan to roll over into another payday loan, causing an endless cycle of high debt. This can be harmful to your credit and cause you to drown in debt.
Anyone who can afford to pay their loan back in a short amount of time. Payday loans should only be pursued if you have no other options.
Learn More: Where to Get a Payday Loan
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