As there are type of loans, there are also types of personal loans. A personal loan is a kind of loan borrowed for self uses ( excluding business purposes).
This type of loan could be used to settle a medical bill, pay off a previous debt or to settle your current financial needs. Usually, a personal loan does not require the pledging of a collateral, and be paid back on installments.
When borrowing a personal loan, a borrower’s credit score and monthly income is used as a major determinant. These factors will be used to determine if the loan will be approved or not.
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So, the higher your credit score, the better your chances of getting a personal loan, and also the higher your income, the higher your chances of getting a personal loan.
Like I said earlier, most personal loans do not require any form of collateral. They are called unsecured personal loans. However, this is just a type of various personal loans that are available. There are other types of personal which include the secured loan. They will all be mentioned and explained fully later in this article.
A personal loan can also be used to purchase a car for your personal use and usually comes with lower interest rates. They are more flexible than other types of loans like Business loans.
In fact, some money lenders allow borrowers repay loans in over 5 years. This shows how flexible personal loans are. Now let us see the types of personal loans that we have. Knowing them could save you the time and stress of reading lengthy loan agreements when you get to banks or other money lending organizations.
Types of Personal Loans.
We have identified 7 major types of personal loans and have decided to share them all here with you. After showing you the major types of loans, we will mention other types of loans, which are actually minor ones.
The major types of personal loans are;
- Unsecured personal loans
- Secured personal loans
- Co-signed personal loans
- Debt consolidation loans
- Personal line of credit
- Fixed rate loans
- Variable rate loans
- Unsecured Personal loans
This type of personal loan is very common because it is 100% unsecured. That is, it doesn’t require a collateral backing. Other types of loans are backed by collateral like your car, land, home or any other valuable asset.
However, due to the absence of collateral in this loan system, which is in turn very risky for lenders, the borrowers might be required to pay a higher APR(Annual Percentage Rate), when compared to other types of personal loans.
Moreover, the Annual Percentage Rate paid by borrower’s of this loan differs in relation to their credit score. Your credit score helps in reducing the amount of money you will pay back as interest on a monthly basis.
The unavailability of collateral for borrowing this loan makes it much more easier to acquire the loan, unlike other loans which seem very hard to borrow due to collateral request.
It is recommended for an individual with no form of collateral to apply for this loan, but must in turn be ready to pay a higher Annual Percentage Rate. Usually, unsecured personal loans are repaid on a monthly basis.
- Secured Personal Loans
If you need a personal loan with a fairly low interest rate, you should try this type of loan. Although, it is backed by collateral.
Example of collateral used are your car, house(mortgage). In case you default on your loan repayment terms and conditions, the lender has full right to seize the property you have used as collateral.
Moreover, this loan is recommended for borrowers who have valuable assets and wish to get a personal loan with a lower Annual Percentage Rate. Unlike the unsecured type of loans, the secured loans are considered less risky for lenders hence the lower interest rates.
Also, if the borrower has a very low/poor credit score, he/she is advised to take this type of loan, because your credit score is not a major loan approval determinant.
One more thing, asides using your car or house as collateral for a secured loan, a lender might ask you for your access to personal savings and will claim ownership upon the borrower’s default on the loan agreement. Borrowers who do not own any mortgage or car assets can apply for this loan with their personal savings.
- Co-signed Loans
A secured loan might either be a secured or an unsecured type of personal loan. Here, to take this type of loan, the borrower is asked to bring another person, with a good credit score to sign the loan agreement.
This person is known as the Cosigner or guarantor. In case the borrower defaults on the loan repayment, the guarantor will be held responsible for paying back the loan borrowed. Therefore, the cosigner acts as a form of insurance for the borrower.
If the borrower does not repay the loan, the credit score of the cosigner will be affected instead of that of the borrower. So, before acting as a guarantor for someone else taking this loan, you must think of your reputation first and your credit score also.
If you are the borrower, and you are very sure you will pay back the loan as at when due, you can find a cosigner who will help sign the loan for you.
When your cosigner has a very good credit score, you, as the borrower will be considered for loans with lower interest rates and better repayment conditions.
- Debt Consolidation Loans.
A borrower who has other pending loans like credit card debts, medical bills, car debts can apply for a debt consolidation loan.
A debt consolidation loan simply rolls together multiple debts into a single loan, and the borrower pays all previous loan at once.
Usually, a debt consolidation loan must have an interest rate which is lower than that of all the outstanding loan balance which has been fused into.
If you have a change in the pattern of your income, for example, a reduced salary, you can apply for this loan.
- Personal Line of Credit
This type of personal loan is very unique in its own way. A personal line of credit gives you access to borrow a particular loan as at when you need it. Here, you do not need to borrow a large amount which ends up in your bank account and had no tangible use.
As you borrow, an interest rate is fixed and you will repay the loan with that interest rate. This type of loan is very advisable when you have immediate needs or unplanned emergencies like school fees, medical bills, accidents damages and the likes.
Also, the Personal Line of Credit loan has a lower interest rate than other types of personal loans. If your income has reduced suddenly, and you have a greater expenditure to meet, a personal line of credit could be the best option for you.
When applying for a personal line of credit, lenders judge using factors like your credit score, and your income to approve your loan request.
To clarify, a personal line of credit allows you borrow an amount of money but leave it with the lender until it is needed. When the money becomes needed, you can withdraw a fraction of the amount of money you have borrowed in full. So when it comes to repayment, you will only pay interest on the amount you have collected and not the borrowed capital with your lender. It works exactly like a credit card.
- Fixed Rate Loans
For a fixed rate loan, the borrower is required to pay a fixed amount every month till the whole loan is repaid completely. Most lenders offer these kinds of loans to borrowers depending on their credit history.
The amount of money paid installmentally by the borrower must be equal including or excluding the interest rate. That is, the borrower is not permitted to repay less or more than the stated amount.
This type of loan is recommended for those who receive a fixed amount of income monthly/yearly. With this, a percentage is calculated and must be paid regularly. In summary, a fixed rate loan has a fixed loan repayment tenure.
For example, if you borrow a loan of $100,000, and you are to pay a fixed rate of 10% every month on an interest rate of 1% monthly. The borrower will be paying back a total amount of $11,000 every month for the next ten months.
- Variable Rate Loans.
Many individuals do not have a fixed income as their income varies from time to time. You can decide to pay 5% interest this month and pay 3% interest the following month.
This type of loan will make sense if you do not mind the amount of time you will use to repay the loan. Variable rate loans are repaid on a long remand can take up to 2 years to be paid off completely, depending on the amount you have borrowed.
Taking a personal loan requires a lot of consideration as well as calculation. You must think of your current situation or circumstances before going for any type of personal loan.
If you are the type without any form of collateral, you can easily apply for an unsecured loan, and you can as well apply for a secured loan if you have your personal savings. This can serve as a form of collateral in some cases too.
If you have a very poor credit score, and need loans with favourable terms and conditions, a Co-signed loan will be a very good alternative, but you will need to find a guarantor or cosigner.
Furthermore, some borrowers like to repay loans in a longer period of time. The type of loans suitable for these kinds of borrowers is the the variable rate loans. Borrowers can decide to stretch their repayment tenure longer than when using the fixed rate loans.
If the borrower is a fixed income earner, such as a salary earner, the fixed rate loan is recommended for him/her.
There are other types of loans which are not included above. These types of personal loans are under the major personal loans, which have been mentioned earlier in this article.
Other personal loans include payday loans, pawnshop loans and credit card cash advance.