Personal Loans
There are many types of personal loans that could help you achieve various goals. Loans that are best for large purchases, consolidating other debts, covering medical bills, and even providing emergency funds show why this versatile borrowing option is popular for many different needs. But deciding which is best for you can be confusing. Let’s break them down so you can make a solid financial decision.
Terms you should know before taking out a personal loan
- Principal: This is the total amount you borrow. Lenders calculate interest based on the principal you owe. Making on-time loan payments decreses the amount of principal.
- Interest: As you repay a loan, you re repaying the principal along with interest—a fee the lender charges for allowing you to use their money. Interest is usually a percentage of your owed principal.
- APR: APR stands for “annual percentage rate.” This is the percentage of interest you’ll be charged as well as any fees from the lender. Knowing the APR of a loan provides a clearer picture of the actual cost to borrow.
- Loan term: This is the time you have to repay the loan. When a lender approves your personal loan application, they’ll specify the loan term.
- Monthly payments: Each month during the loan term, you’ll make a payment. This includes money toward reducing the principal and a portion of the total interest you’ll owe over the loan’s duration.
The types of personal loans
Choosing the right type of loan is crucial. There are several factors to consider before you decide which type of loan to pursue. Here are some types of personal loans and their uses:
Unsecured personal loans
An unsecured loan is the most common type of personal loan. They don’t require collateral and typically rely on the borrower’s credit score or the score of a cosigner. Rates and terms vary based on the borrower’s qualifications.
Secured personal loans
Unlike unsecured loans, secured loans do require collateral. Collateral is something of value that you offer to the lender in the event you don’t repay the loan. For home-equity or auto loans, the equity you have in the property you’re buying serves as the collateral. Some lenders allow borrowers to secure a loan with personal savings or other assets. Secured loan APR rates are usually lower than unsecured loan rates.
Fixed-rate loans
Most personal loans have fixed rates. This means your APR and monthly payments remain constant throughout the loan term. Fixed-rate loans are ideal if you prefer consistent payments each month. They’re also beneficial if you’re worried about rising interest and want to lock in a rate. Budgeting is easier when payment amounts don’t fluctuate.
Variable-rate loans
Variable-rate loans have interest rates tied to a benchmark rate set by banks. Your loan rate, total interest costs, and monthly payments can change based on bank fluctuations. Variable-rate loans often have lower APRs than fixed-rate loans. They may also have limits on how much the APR can vary over a specific period and the loan’s term, capping how high or low your interest rate can go.
Co-signed and joint loans
Co-signed and joint loans are aimed at those who can’t get a personal loan on their own or want a lower APR. However, co-signed loans and joint loans differ. A personal loan with a co-signer requires a second party who promises to repay the loan if the borrower can’t, but the co-signer does not have access to the borrowed funds. However, a co-borrower on a joint loan is liable if the other borrower doesn’t make payments and can access the loan funds. Having a cosigner or co-borrower with strong credit can improve your chances of qualifying and may secure a lower rate or better loan terms.
Debt-consolidation loans
A debt-consolidation loan combines multiple debts into a single new loan. Debt consolidation loans can be a smart choice if you need a lower APR than your current debts, saving you money on interest. It can also reduce your credit utilization by combining all of your debts into a single loan, potentially improving your credit score.
Buy now, pay later loans
Buy now, pay later (BNPL) loans let you divide an online purchase into smaller payments. You set up an account with an app at checkout, and after making an initial payment, you authorize the app to let you pay the rest in installments. BNPL loans are ideal for significant, one-time purchases that you can’t afford with cash. These apps review your banking information and may perform a soft credit check before allowing you to create an account.
A personal line of credit
A personal line of credit is a type of revolving credit account, similar to a credit card . Instead of a lump sum, you get a credit line to borrow from as needed. You only pay interest on the amount you borrow. This type of credit is useful for ongoing expenses rather than a one-time purchase.
Credit-builder loans
Credit-builder loans help individuals with little or no credit history. You don’t need good credit to get approved, but you must have enough income to make payments. These loans can help you establish credit or improve your credit score. Building a good credit history can assist with future approvals for credit cards and loans. If approved, the loan amount is held in a bank account while you make payments. Typically, you can’t access the money until the loan is fully repaid, allowing you to build savings and credit simultaneously.
Choosing the right type of personal loan
Take your time deciding the best type of personal loan for you, explore your options, use a loan calculator to determine what you can afford, and make informed choices. There are many types of personal loans, and being knowledgeable is the first step to selecting the right one for you.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.