A personal loan is the most common type of loans for individuals in the USA. Millions of people opt for personal loans for whatever needs: purchasing goods and travelling, studying and medical treatment, buying vehicles and refinancing existing loans.
Unlike, for example, mortgage loans, personal loans do not have a specific purpose, so a borrower can spend money on anything he intends to.
Personal loans differ and one can choose a type of credit which is aligned with financial needs and capabilities. There are seven main types of personal loans, where terms of each one could be customized for a particular borrower. Normally, banks and non-bank lenders don’t have strict requirements to a potential borrower for a personal loan as this loan is quite expensive.
Types of personal loans
It’s the easiest to get type of a loan where a borrower can have an instant access to needed money right from his bank card. One doesn’t need to meet certain bank’s requirements to get the money. In other words, a cash advance is a short-term personal loan of a fixed ceiling (max amount), where the ceiling depends on a borrower’s solvency, credibility and credit score.
Installment loan implies a borrower has to repay a certain amount divided into several fixed portions – installments. Along with installments, a borrower pays interest rate above that. The cost of installment loans differ considerably and the interest rate on this type of personal loan is usually pretty high.
It’s the most common way of getting a personal loan, besides, a credit card doesn’t limit a borrower by the fixed, one time-paid amount of loan. A bank withdraws an interest rate for using borrowed money automatically at the end of a month.
Payday loans are the most expensive loans where a lender grants money for a very short period – until the payday of a borrower. A borrower provides a lender with the electronic access to his account, so right at the moment when a person’s salary drops on the account, a lender takes his money away and so the loan is paid back.
The loan is purposed to unite all existing problematic loans of a borrower in order to make it easier and cheaper for a debtor to repay one single consolidation loan. This loan is often considered an alternative or preliminary step to bankruptcy, giving the debtor a chance to manage his financial obligations.
This is a special type of personal loan that stands out of a crowd, and here is why: a lender does not require a borrower to provide the bank with collateral. A borrower’s single signature is taken as a promise of repaying the loan and exactly the signature acts as collateral.
That is why signature loans are often called loan of good faith.
If you are eligible, your bank may allow you to use bank’s money even if your card’s balance is negative. Depending on the terms of overdraft you may or may not be charged interest rate for use of money. Overdrafts are very popular among small business owners as one doesn’t have to think whether it’s enough money on the card to make a purchase, so a business owner always has an access to funds.
Unsecured personal loans
Almost all personal loans are unsecured and that means you have to be eligible for getting it. A bank doesn’t have collateral as a guarantee of getting money back, and so one should meet quite a strict requirement in terms of credit score and credit history.
Unlike with the secured loans, a lender doesn’t repossess your property automatically if you fail to repay the loan. This is actually the reason why there are so many Americans who end up in bankruptcy after getting several unsecured personal loans without real means to pay loans back.
Like any other type f loans, unsecured personal loans could be taken under fixed or variable interest rate, depending on borrower’s choice. Variable interest rate can be somewhat lower than fixed, but in certain circumstances, it can go higher, so one should be prepared to it.
Fixed interest rate is a guarantee that the cost of the loan will stay the same for the whole loan’s lifetime.
Personal loans vs. Lines of credit
When it comes to borrowing money, the most common dilemma is whether I should choose a line of credit within my bank card or I’d better opt for a personal loan. Let’s take a closer look and compare.
A personal loan is a one-time given loan and its amount could not be extended. You receive a fixed sum of money and a fixed term of repayment (for example a year or two). An amount of a persona loan available depends on your credit score and you can’t receive more than the amount you are eligible for according to credit bureau’s data.
The Line of credit is a loan that is extended in time and could be renewed again and again proportionally to a borrowers’ credit score growth.
Applying for a personal loan
Usually, it’s wise to shop around before applying for a loan, so you may choose the best terms offered. Still, if you already have an account with a certain bank, it’s always easier to get a personal loan with this lender. Your bank knows you, you have credibility in bank’s eyes and so the requirements to your eligibility could be significantly softer.
Pros and Cons of a Personal loan
The biggest advantage of a personal loan is that a borrower doesn’t need to provide a bank with collateral in order to secure the loan. On the other hand, it’s harder to get a personal loan that a secured loan in terms of higher credit scores required.
A personal loan could be taken for whatever purpose, unlike specific mortgage loans or car loans. Literally, a borrower can’t be forced or told to spend money on something.
The biggest con of a personal loan is, typically, a high interest rate. Depending on the type and term of a personal loan the average rate is about 10-13%. When you are shopping around in search for the most beneficial terms for your loan, always request %APR (Annual Percentage Rate) instead of just Interest Rate. That is how you will get a real, full price of your personal loan within that particular lender.