Life isn’t perfect. There will be times when you find yourself in a bind financially, and there is no other option but to apply for a loan. Fortunately for you, there are a number of personal finance loan options that you can look into. The question is: what’s best for you?
Personal loans come in many forms. There’s debt consolidation, fixed-rate, variable-rate, and unsecured. If you go back to the question of which is best for you, the answer is: it depends. You see, all of these types have their own advantages and disadvantages. So basically, the best option will be determined by your current circumstance. Let’s delve into these even further.
Most commonly, people apply for personal loans that are unsecured but with fixed payments, although others prefer secured and other types of loans. But why is that so? It works best for them, again, depending on each circumstance and other factors, which include their credit score, as well as the time set to repay the said loan. Unfortunately, those with a poor credit score don’t have many options when it comes to interest rates and loan terms.
To give you an idea of what makes each loan type different (or similar) to each other, let’s get deeper into each one.
Different Personal Loan Types Options
Secured Personal Loan
A secured personal loan is typically backed by any form of collateral, which makes it less risky for creditors. In case there’s a default on your loan, your lender can seize this collateral, such as in the case of car loans and mortgages. Under these circumstances, you need to secure the title of your car and house, respectively. People borrow against their assets, personal savings, home, or car from online lenders and banks, as well as credit unions.
Unsecured Personal Loan
This is the riskier type for creditors because you don’t need to present any form of collateral with an unsecured loan, like your car or home. What’s the catch though? Since there are no collaterals required in this loan, lenders charge rather higher percentage rates annually. Your credit score plays a huge role in getting approved of an unsecured loan. The terms of payment range from one to seven years, with about a 5-36% rate.
Variable-Rate Loan
Banks set a base interest rate on a variable-rate loan. This means the rate, the monthly payment, and total interest cost could fluctuate should there be a shift on the benchmark rate. One month it could be higher, and the next month it could be lower, depending on the variable. One benefit of a variable-rate loan is it carries a rather lower APR compared to a fixed-rate loan. Also, there is a cap limiting the highest rate given for a specific period and through the life of your loan. This might work for those who prefer loans with shorter repayment terms. Yes, the rates may actually rise, but it will be rather unlikely to surge within a short period.
Fixed-Rate Loan
A typical personal loan incurs a monthly fixed rate, hence the name. Here, your installments or monthly payment remains the same as long as you have this loan unpaid. This works for individuals who prefer paying consistently at a fixed rate on a monthly basis. Also, you don’t have to worry about increasing rates associated with a long-term loan. You could say that having a fixed monthly rate makes budgeting easier, and you will be at ease for unchanging payments.
Co-Sign Loan
If you have no credit history – or you have a very thin one – and you don’t qualify for any loan under your own name, another person of good credit standing may co-sign a loan with and for you. This means another person will assume the responsibility of repaying the loan, should you fail to do so. Lenders somehow get the assurance and guarantee of repayment from a co-signer.
The good thing about a co-signed loan is that you are more likely to get favorable terms and lower rates with a co-signer of strong credit. The downfall is that it might not be easy for everyone to find someone who is willing to assume this responsibility.
Debt Consolidation Loan
If you have multiple debts, there is a loan that will roll these into one new loan called debt consolidation. You should be able to save on interest rates since this loan carries a lower APR compared to your current debts’ rate. Additionally, debt consolidation will simplify payment on your debt through a fixed payment every month since several debts are combined into one.
Personal Line of Credit
If you have an emergency or ongoing expenditures, borrowing from your personal line of credit works best. This type of loan is more like using your credit card instead of getting a personal loan. You can access your credit line for borrowing cash every time you need it, instead of a one-time lump sum. Your interest payment is solely based on the amount you borrowed.
Pawnshop Loan
People prefer secured loans if possible since you can use your assets to borrow some money. Now, it doesn’t need to be your car or home. Electronics and jewelry are common items you can pawn for a period of time in exchange for money. APR here can reach as high as 200%, not to mention the rates are pretty high. However, it’s not as high compared to a payday loan. On the plus side, your credit score isn’t affected at all, and no debt collector is ever going to hound you. The downside is that you will lose your possession if you fail to repay your loan since the pawnshop has the right to sell unclaimed pawned assets.
Credit Card Cash Advance
This option is available but seldom used and least preferred due to the high-interest rates. You can borrow cash for a short period using your credit card but with an additional cash advance charge. This can be about $5-$10 or as high as 5% of the principal, which is somewhat higher if you use your credit card for purchases.
Payday Loan
When you need less than a few hundred dollars, think about a short-term loan option called the payday loan. This is a type of unsecured loan, and as such, it comes with a high-interest rate and is very risky. As the name suggests, you borrow money with the intent to pay on your next payday and not on installments. The problem with this loan is that you can easily get entangled with a web of additional loans. Since it’s easy to get one, you can easily add more on top of the loan until the charges on your interest rate mount up. Be careful, as you might end up paying higher APRs.
How are you going to improve your creditworthiness? Try improving your own credit score. In doing so, the following factors must be considered.
3 C’s of a Loan or Credit: How Do They Affect Your Personal Loan?
It’s as equally important to know if you are qualified for a loan or credit as much as knowing the available loans you can apply for at any time. To be creditworthy in the eyes of creditors, you must know that they look into the 3 C’s of a potential borrower. Of course, one’s credit score plays a crucial role in affecting one’s ability to pay a loan. But the most important factor you must understand is that your credit score is affected by previous or existing loans, your outstanding debt, if any, as well as your recent salary.
Since credit scores are dynamic, you can already assume that your attitude towards accrued debts and managing your bills will be largely affected. It may play to your advantage or disadvantage. In other words, it could have a positive or negative impact on your creditworthiness, depending on your 3 C’s of loan or credit.
So what are these 3?
Character
Believe it or not, a potential lender may judge your character based on your credit score. It’s nothing personal, but creditors need to assess your honesty, as well as your reliability in repaying your debt, among other considerations. These may include, but not limited, to the following:
- History of previous credit
- Paying bills as scheduled or on time
- Length of residency at your current address
- Length of employment at current workplace
Capital
Do you have assets of value, such as personal property, real estate, savings, or investments? Lenders will definitely look into these things to ensure your debt will be repaid should your main source of income become unavailable due to unavoidable circumstances.
Capacity
Your capacity to pay any debt is crucial for lenders. Your current employment and income are looked into to gauge whether these will be sufficient in providing future loan payments. How will lenders determine all of these? Several factors play a role, which may include the following:
- Your monthly salary
- Your current loans
- Your current living expenditures
- Your existing debts
- Your number of dependents
Finding the Best Personal Finance Loans
There is nothing wrong or to be ashamed of with borrowing money. The reality is that almost everyone will find themselves needing money for many reasons. It could be personal, medical, emergency, investment, and others. The options are there for you to choose from. You just need to know which of the loan types is best for you. Ask yourself these questions:
- What is your circumstance?
- What do you need the loan for?
- What are the interest rates?
- How much are you planning to borrow?
- What is the loan term?
- Will your income be sufficient to repay the loan?
Generally, your decision is guided by these factors. However, understanding why these factors are important is crucial. Keep in mind that all of these loans differ from each other despite the similarities.
Knowing Your Purpose
Do you need to borrow money? Why? Is it an emergency? Do you have a continuing monthly bill you need to pay off? Do you need to invest in a business? Do you plan on a major renovation or home improvement plan? Perhaps you plan on moving to a new place, and the moving expenses exceeded your allotted budget? Remember that loans are an additional monetary obligation on your part. Don’t put yourself in a binding position by securing a loan for an unimportant purchase or expenditure, unless you have the capacity to repay it.
Comparing Different Loan Types
It’s critical to compare different loan types available. A loan with a low-interest rate means big savings on your part. Look into the loan requirements and monthly payment schemes of the institution. The goal is to get the best interest rate and affordable payment per month suitable to your budget or capacity.
High Fees Might Put You in the Deep
Quick cash from payday loans might have its perks, but watch out for those high fees that are almost equating to 400% APRs. You will be paying percentage rates annually that’s above the roof, whereas a two year term personal loan might just incur about 10-11% APR.
Probability of Losing Your Property or Assets
Secured loans may sound more appealing because of lower interest rates and possibly more flexible payment terms. However, don’t forget that you take your loan by pledging your property and assets as collateral. And should there be a default to repay the debt on your part, there is a possibility that these lending institutions will repossess or foreclose your property. Lenders could even seize your savings, car, or home as a form of payment on your loan.
With so many loan type options available for you, it’s clearly fairly easy to get any loan at any time. The point is, you should start working on improving your credit score and maintaining a good credit standing to get the best interest rates and terms. Be informed to come up with a wise decision.
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