January 29, 2021
Types of Personal Loan You Should Know to Ease off the Financial Burden
By : Ellie Brown
Personal loans are the most common forms of loans available. The usage depends upon the needs of different individuals. Reasons can vary from paying off wedding expenses, paying medical bills, consolidating debt and many more.
Personal loans are available and can be borrowed in the form of unsecured loans, i.e. no collateral is required to borrow an unsecured personal loan.
If you default on your loan, you are not losing out on any of your assets in the form of collateral.
A personal loan is usually used to help you pay off your high-interest debt faster. For example, if you are using a high-interest credit card debt, the personal loan is your saviour.
The right way to pay off your debt with a personal loan is to apply for the amount that you owe on your credit cards. Once the amount is approved, you can pay off your debt instead of making monthly payments on your loan.
The interest rates attached to personal loans depend on many factors. Borrowing a lower interest rate loan can lead to significant savings.
Another fair use of a personal loan is to finance your big purchase, such as buying a new home or paying off your substantial medical bills.
Credit rating is crucial while getting a loan is checked by lenders while analyzing your loan profile. Lenders pay great attention to your credit score before lending a personal loan.
Since personal loans do not require any collateral, credit score determines the credibility of the borrower. Generally, people with a high credit rating are more likely to get loans at affordable interest rates.
1. Secured personal loans
As the name says, for a secured personal loan, collateral is a must. You can offer any collateral such as your home or a car or a certificate of deposit to fulfil secured loan criteria.
These are best for lower interest rates. Since secured loans are considered less risky because of the collateral, they often come with lower interest rates.
Secured loans are borrowed in exchange for an asset. A secured loan may help you on saving money on interest as there is no risk of defaulting and collateral is involved.
One of the drawbacks of borrowing secured personal loan is the risk of losing put on your property (collateral) in the nonpayment of the loan. If you cannot pay your debt, the lender has the right to seize your asset (collateral).
2. Payday loans
Payday loans are different than personal secured or unsecured loans. They generally are high-cost and short term loans, and the payment is due by the next day.
The state regulates the lenders, and hence the loan factors vary from place to place. Loan factors include the loan fees, loan amount and many more. Some states have the facility of payday loans, while others have banned the concept of payday loans.
The repayment of a payday loan requires a post-dated cheque of the amount plus any interest amount or fee. The lender can withdraw the loan amount from your bank account.
Payday loans are a beneficial option when you do not have access to cheaper forms of credit but have high fees attached to them. These loans are easily available. Due to easy availability, people can get guaranteed payday loans from direct lenders.
3. Pawn shop loans
Pawnshop loan is another good option that involves fast cash lending. The loan amount you get is based on your asset’s value that you carry in exchange for your loan. The item can be a piece of jewellery or any electronic item.
Most of the pawnshop loans are unregulated, but some states have intervened and are trying to regulate. These loans have high-interest rates. You can get your item back only when you pay the full loan amount and the repayment time varies from state to state.
No credit check is required while opting for these loans and is a little less risky than the payday loans.
In case of nonpayment of your loan, the pawnshop is liable to sell your item. You can get your loan term renewed but with additional fees or storage costs.
4. Home equity loans
Another type of secured loan is the home equity loan where the collateral is required in the form of your home.
The amount is decided by calculating the difference in your home’s market value and the amount that you owe on your home. The borrowing amount cannot exceed more than 85% of your home equity.
Home equity loans are an excellent alternative for a personal loan. These loans can be used for various purposes from making a big purchase to paying your medical bills.