If you need money to cover an emergency, make a big purchase, or consolidate debt, a personal loan is one of the easiest financial instruments to choose. With a personal loan, a bank lends you money from a few hundred to tens of thousands of dollars, usually at a fixed rate and for a fixed period, usually between one and five years.
This article explains the lingo to help you understand what types of personal loans are available, what are the pros and cons of each, and what the alternatives are.
Since most personal loans are unsecured loans, banks charge higher interest rates and fees than, for example, a car or home loan secured by your car or apartment. An unsecured loan is not covered by collateral.
Predictable payments. Typically, you initially receive a flat rate and then you have a fixed payment each month for the duration of the loan. This is called an installment loan, a term that is sometimes used in place of personal loans.
Good credit rewards. Those with credit scores in the high 600 and 700 will find it easier to get approved, but personal loans are available for those with less than perfect ratings.
As mentioned earlier, a secured loan is backed by collateral like a mortgage or an auto loan. And although most personal loans are unsecured loans, some banks or credit unions offer asset-backed personal loans like a savings account or CD. This CD may have a big prepayment penalty, but now you need the money. A secured loan is a way to access this money without paying fees or selling the asset, even if you pay the bank monthly interest on the loan and possibly fees.
Lower rates. Because the loan is secured, banks may offer lower interest rates than unsecured loans.
Higher risk for you. It also means that the lender can seize these assets if the loan is not paid.
Most personal loans are offered at fixed interest rates, so the interest rate and payment remain stable over time.
Easier to budget: Again, predictable payments mean you know more easily what you owe each month.
Higher interest rates: since the lender takes more risks, interest rates can be higher.
Variable interest rates mean exactly what it seems: your interest rate can change over the life of the loan. These are usually found with a line of credit offered by some lenders. With a line of credit, the lender approves the loan up to a certain amount.
Borrow only what you need. Then you can choose what you want to borrow within this limit. You make monthly payments but only pay interest on the amount borrowed.
Fluctuating rates. Interest rates are linked to the whole market. Some lines of credit have fees and you should ask your lender.
Lines of credit that banks make available to customers who meet certain requirements, such as B. a certain amount on an account with that bank. As it meets the (high) asset requirements, no collateral can be required.
Overdrafts of credit lines linked to your checking account. So if you spend more than your checking account in a given month, you have additional flexibility (but remember that you pay interest on the amount you have drawn).
One of the most common types of lines of credit is a HELOC or home equity line of credit. As the name suggests, it is a mortgage. Most HELOCs have a variable interest rate, which may include a lower share rate followed by a higher interest rate.
Fiscal advantages. Interest rates are generally not only lower for a HELOC than for a personal loan, but the interest paid on your HELOC can also be tax-deductible when used for DIY work.
Closing costs. When calculating the total price of this loan, you need to take into account the transaction costs and the possibility of higher interest rates.
A HELOC is different from a home loan, although both take out loans on your real estate. Compare them here.
One of the reasons why many people apply for personal loans is debt consolidation, including credit cards, payday loans and other personal loans, utility bills, and medical bills. The idea is to include all or more in one loan with a single payment and a single interest rate.
Easier to assess. It may also be easier to qualify for a personal loan than other debt consolidation methods, such as B. Credit card credit transfers.
Higher interest rates. A HELOC may have a lower interest rate, but if your credit rating is between 600 and 700 and you don’t have equity in the home or don’t want to borrow, a personal loan can be the best option. Find out more about debt consolidation loans here.
Debt consolidation is not for everyone. If you are in debt, a licensed debt counselor or financial planner can help you consider the different options and create a plan that’s right for you.