The flexibility of personal loans has made these types of loans increasingly popular. They can be used for any reason and have many benefits. Many individuals apply personal loans to consolidating previous debt, but they can also be used for major purchases, home remodels, vacations or any other personal reason.
Some of the benefits could include:
- Faster access to money
- Fixed-rate interest
- Large loan amounts
- The loans do not have to come from a bank — loans are given at the discretion of the buyer and can be issued for a specific amount.
Unsecured and Secured
A personal loan can be a secured loan or an unsecured loan.
With a secure loan, the borrower offers an asset that will pose as collateral. If the borrower cannot pay back the loan, the creditor can take the asset, which can be something along the lines of a car, house, or other item of great value. A home equity personal loan is an example of a secured loan where the amount is fixed, and the house itself poses as an asset.
An unsecured loan is considered more high risk seeing as it does not require any kind of collateral. Consequently, the interest rate will be higher. Each loan can have its benefits and depends on the individual when deciding which loan is best.
All personal loans will either be secured or unsecured. While the actual types of personal loans can vary and the possibilities are almost endless, these are some common types of personal loans.
This is the most well known type of loan. The loan is a set amount and is repaid over time along with interest. The term of the loan varies and the creditor usually determines the interest rate, as well as how often payments are made and for how much. These loans are low risk, can be approved of faster than most and usually will have lower monthly payments.
Another common type of personal loan is the fixed-rate loan. Almost all personal loans will be fixed-rate. The loan is a set amount with an interest rate that does not change, which is what makes this loan appealing to individuals wanting to make big purchases such as a home or a car.
This loan is ideal for businesses and should be agreed upon between a borrower and a lender who have a trusting relationship. With convertible loans, if the borrower has a withstanding amount after a certain period of time, the lender has the option to convert all or a portion of the outstanding loan amount into some form of equity with the borrower's company. Over time having equity or, in some cases, partial ownership of the company, might be worth more for the lender. It is a kind of investment on the lender's part and is appealing to many lenders.
Also known as single payment loans, the interim loan is used for temporary financing and is repaid with interest in full at the end of the agreed-upon term. The interim loan is typically sought after as a short term solution while a long-term solution is being arranged. Many start-up businesses will apply for an interim loan until further funding can be acquired. Home equity line of credit and a short-term personal loan is an example of a secured interim loan.
Also called variable-rate loans, adjustable loans are a more risky loan where the interest rate adjusts at different intervals throughout the term of the loan based on numerous factors. The lender has to abide by an interest rate cap where they can no longer raise the amount of interest. Adjustable loans are easy to get and the original interest rate is typically lower than interest rates of other loans.
Finding the right loan can be a timely process that involves sorting through long lists of available loans. When looking for the right loan, keep in mind that a lot of personal loans are a scam. Do as much research as possible, talk to people who have already taken out personal loans, and know the risks involved.