A personal loan is an installment loan repaid over a set period. Personal loans can be utilized for many purposes, such as:
– Home repairs or improvements.
– Consolidating higher-interest debt, like student loans or credit cards.
– Medical treatments not covered by insurance.
– Purchasing a home appliance, or making any other large purchase.
Types of Personal Loans
Personal loans are of various types, including:
Unsecured Loans: Most personal loans are unsecured, which means they don’t need to be secured by collateral. Such loans are backed by your solid credit history and sometimes that of a co-signer. To be approved for an unsecured personal loan, you must have a credit score between 670 and 739 or more.
Although there’s no property that the lender will take if you default on your payments, negative consequences are still possible. If you make late payments or fail to make them altogether, it could damage your credit score.
Secured Loans: If your score isn’t in a good enough shape to help you get an unsecured personal loan, you could instead get a secured personal loan. However, these loans require you to provide collateral in the form of a savings account, vehicle, or certificate of deposit.
The interest rate on secured personal loans is lower than that on unsecured personal loans because there’s less risk for the lender. If you fail to make payments or don’t make them on time, the lender takes your collateral.
Adjustable-Rate Loans: Adjustable-rate loans, also called float-rate or variable-rate loans, have interest rates that change over time. The interest rate typically starts low. After a certain period, it may increase based on market conditions, due to which your monthly payment may go higher or lower.
Although there are caps on the amount of interest you can be charged, there’s a good chance you may get stuck with a higher rate and fluctuating monthly payments. An adjustable-rate loan is a good option only if you can repay the loan quickly.
Fixed-Rate Loans: Most personal loans are fixed-rate loans, which means that their interest rate doesn’t change over the loan term. Because of this, the monthly payment remains the same as well, so you know exactly how much to keep aside every month to make the loan payment. You can also find out in advance how much overall interest you’ll have to pay.