What Are the Common Types of Personal Loans?

Juliet D'cruz

Updated on:

Do you want to be financially free?

Then it’s time for you to learn about personal loans. Personal loans are a great way to consolidate your debt or tackle other financial goals, like home renovations!

Personal loans come in all shapes and sizes, and they’re easy to apply for. However, if you take out a loan without understanding the contract, you’ll only be setting yourself up for failure.

What types of personal loans are right for you? Read on to find out!

Unsecured Loan Personal Loan Options

Let’s start by exploring what the unsecured loan is all about. An unsecured loan is a loan that is not secured against any specific assets. This means that if you default on the loan, your creditor can’t take your house or car, or other personal property as compensation for the debt.

There are two main types of unsecured loans: bank loans and credit card cash advances. Bank loans typically have lower rates than credit card cash advances, but they may require collateral such as a car title.

Whereas, credit card cash advances usually come with higher interest rates because it’s considered to be riskier to lend money without collateral involved. If you default on an unsecured loan, you will be responsible for paying off the debt in full.

Click here – Video Scripting and Storyboarding Tips for Promo Videos 

Secured Personal Loan Options

Moving on, a secured loan is a type of unsecured personal loan that uses collateral. The main difference between an unsecured loan and a secured loan is that you’re using something valuable as security for the debt.

One of the most common forms of secured loans is a mortgage. Mortgages are usually taken on when someone wants to buy property without providing the full amount upfront.

Let’s say you want to buy a house worth $100,000 but only have $10,000 saved. You would pay off the rest of the amount by taking out a mortgage. The mortgage is essentially an agreement to make monthly payments on the loan for a certain period.

Although mortgages are some of the most common types of secured loans, there are other types available as well. For example, you can also get home improvement loans if you want to finance renovations or repairs to your current property.

Whether you go with a secured or unsecured option, you should focus on finding a low-rate loan. Look for large lending institutions, like Plenti, because these are the lenders that can provide you with choices.

Home Improvement Loan

Are you looking to renovate your home? Then an unsecured home improvement loan could be the best choice for you. Home improvement loans, also known as home equity lines of credit (HELOCs,) are often taken out to finance renovations or repairs.

Let’s say you want to install a brand new roof on your house, but you don’t have the budget for it at the moment. A HELOC would allow you to take out a loan against your property without having to sell it. This may be appealing if you live in an area where housing prices are stable and unlikely to drop anytime soon.

Home improvement loans usually have a fixed interest rate, and they may or may not change over time. The rates will vary depending on how much you borrow and what type of plan you choose.

Before taking out a home improvement loan, we suggest using an emergency fund calculator. Find out how much you need to save up to stay afloat if the worst should happen. Having loan payments ready to go, can provide tremendous peace of mind.

Credit Card Loan

A credit card loan is another type of unsecured personal loan. Instead of coming from a lending institution such as a bank, the loan comes directly from a credit card company. Credit card companies are happy to give you money, as long as you meet certain requirements.

The requirements include things such as having good or excellent credit scores. Other factors include job status and work history.

Just like other types of loans, it’s important to manage your debt responsibly and make sure you understand all the terms and conditions before signing up for one. This will help prevent any unnecessary costs from accumulating on your account balance.

When you take out a credit card loan you don’t need to provide any collateral. This makes it one of the most common types of unsecured loans. People can easily borrow money without having to give up their property.

Open-Ended Loan

An open-ended personal loan is one of the most flexible types of personal loans available. It’s also one of the most common types of unsecured loans because it offers a lot of borrowing power.

How does it work? The lending company deducts a preset amount from your credit card each month until you’re fully repaid. The loan can be paid back in months, or years, depending on the repayment schedule.

It may seem like an easy way to borrow money for large purchases without having to pay off interest or fees, but this isn’t always the case. For example, if you only make minimum payments each month then the total balance due will increase over time since

For example, if you borrow $10,000 from a lending institution, you’re responsible for paying back the full amount plus interest over a certain time frame. Most lending institutions offer open-ended loans because they have high chances of earning interest on larger sums of money. Whereas the alternative is offering smaller loans that would be paid off quickly.

Open-ended loans are usually determined by how much you borrow and how long it takes to repay the loan in full. For example, if you need $10,000 but are given 3 years to pay it back, your monthly payments will likely be lower than someone who needs $10,000 paid off within one year.

Close-Ended Loan

On the opposite side of things, you have the close-ended loan. This is also referred to as the installment loan because you’re required to pay off the entire balance at once or in small increments.

For example, if you want to borrow $2,000 for one year then you’ll be charged an interest rate that’s usually lower than someone who makes monthly payments over 5 years.

Close-ended loans are determined by an annual percentage rate (APR.) APR is sometimes misunderstood since it may seem like a more expensive way of borrowing money. However, when you do the math right, it winds up being a savvy choice.

APR is the interest rate you pay for borrowing money over time. A lower APR means your balance is accruing less interest; which makes it easier to pay off before any additional charges are added.

For example, if you borrow $2,000 from a credit card with an APR of 15%, then you’ll have to pay back $2,232 within 12 months. But if you choose a personal loan from another lending institution with an APR of 5%, then the total amount due will only be $2,030.

Bad Credit Personal Loan

A bad credit personal loan is a type of unsecured loan that attracts borrowers who have either just started building their credit. You can get this type of personal loan regardless of whether your credit is fair, good, excellent, or poor!

Bad credit personal loans aren’t known to be the most affordable option for borrowers in need of money. However, they do offer several advantages during your application process including quick approval times and less in-depth background checks.

Payday Loan or Cash Advance

One of the first things that come to mind when someone says cash advance is getting cash immediately. And this is exactly what defines this type of personal loan; same-day funding!

However, once you take out a cash advance or payday loan then you’ll need to pay it back quickly. It’s a form of short-term borrowing that’s reserved for borrowers with low incomes. This type of personal loan usually has higher interest rates than other options which makes it best for borrowers who are in an emergency financial situation.

When should you get a payday loan? The answer is simple: when you don’t have any other options.

For example, if your car breaks down and you need it to get to work, then a payday loan might be the perfect option for getting back on track immediately. However, this type of personal loan isn’t recommended for borrowers who are just looking to get out of debt or improve their credit score.

Payday loans typically carry fees that can easily put people into more debt than they started with! It’s normal for the APR rates to be as high as 640% or more, with a payday loan.

Pawn Loan

When you’re unable to make the monthly payment on your credit card, then a pawn loan might be right for you! Pawn loans are known to offer fast approval times and make it easy to borrow money without needing collateral. Keep in mind that the items you ‘pawn’ will need to be redeemed within 30 days or else they’ll lose their value.

Another option for pawn loans is to extend the time before you redeem your collateral. This option makes it possible to complete a transaction within the next several months, so long as you continue making monthly payments on your loan.

Navigating the Right Types of Personal Loans

Now you know about the most common kinds of personal loans. When deciding which types of personal loans are right for you, make sure you consider your own financial needs and goals. Once you’ve considered all things, carefully consider the terms and conditions before signing up for anything.

Click here – Unemployment affects your credit but you can minimise the damage. Here’s how.