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Personal loans are gaining popularity by the day. They’re the fastest-growing type of consumer debt. If you’ve never applied for a personal loan, you may have already asked yourself the question: What are personal loans used for?
We’ve all been in situations where we have found ourselves in need of money. When you have an unexpected expense, want to consolidate debt, or want to make a large purchase and don’t have the money upfront, you may need to take on debt to cope. A personal loan can help you if you need to borrow a specific amount of money.
There are several different types of personal loans, and the proper type of loan for you will depend on your situation. We’ll discuss some of the options for you to consider.
Unsecured Loans
Most personal loans are unsecured, meaning they aren’t backed by collateral. Loan amounts typically depend on your credit score. If you have excellent credit, you will be able to borrow more.
Most lenders charge between 5% and 36%, depending on your credit score. Since the lender takes a risk and has no property to repossess when you struggle to make payments, they may charge higher interest rates. An unsecured personal loan can be a good option if you have good or excellent credit and want a regular monthly payment.
Secured Loans
Secured personal loans are backed by collateral, such as a car, house, savings account, or other assets. Should a borrower default on the loan, the lender can seize the asset to recover all or a portion of the amount owed. From a lender’s perspective, secured loans are less risky.
Secured loans allow them to offer lower interest rates, making secured loans the cheapest types of personal loans available. Since the loan is backed by an asset, lenders may be more flexible about credit score requirements, making a secured loan one of the best types of personal loans for bad credit.
Cosigned Loans
A cosigned loan is a personal loan, either secured on unsecured, where more than one party guarantees to repay it. If you have no credit history at all, or you have bad credit, lenders may ask that you have a cosigner, who will assume and pay the loan if you default. A cosigner is a form of insurance for the lender.
Having a cosigner may improve the chances of being approved and likely provide better terms for the loan. The benefits of taking out a cosigned loan go to the borrower for more money and better terms. The cosigner, on the other hand, may have some disadvantages. The loan will show up on the cosigner’s report, and delayed or missed payments can adversely affect their score.
Before taking up this type of loan, carefully consider the terms and understand that the financial risk associated with it can potentially damage your relationship.
Debt Consolidation Loans
If you have debts in more than one place, a debt consolidation loan allows you to combine what you owe into a single loan with one manageable monthly payment. These types of personal loans can make it easier to manage your finances and potentially save money by reducing the amount of interest you’re paying. You will only have a single payment to make each month and only one lender to deal with rather than several.
If you want to take a debt consolidation loan, assess whether doing so will save you money overall. Start by shopping around for the best rates and terms. You’ll also want to check whether your lender will charge you for clearing your original debts before the end of their respective terms. If so, determine whether the savings you’d make by taking out a debt consolidation loan outweigh the cost of making early repayments.
Many consumers also get tempted to run balances back up on credit cards and other loans after getting a debt consolidation loan, making this loan option ideal for those with the financial discipline to control their debt.
Personal Line of Credit
A personal line of credit is a revolving form of credit. Unlike an installment loan that involves repaying a lump sum on monthly payments, a lender gives a borrower access to a line of credit up to a certain amount that they can borrow as needed. The lender charges interest only on the amount borrowed.
A personal line of credit comes in handy when you need to cover income fluctuations or unplanned expenses such as medical bills. Some lenders may allow you to set up a line of credit that’s linked to your checking account to cover overdrafts. Other lenders offer a secured line of credit backed by an asset.
To apply for a line of credit, you need a good credit history and an excellent credit score.
What You Need to Know Before Applying for a Personal Loan
Before you start shopping for a personal loan, spend time exploring your options. Familiarize yourself with the qualifications you need to meet and the documentation you’ll need to provide. Knowing this information beforehand may improve your chances of qualifying and can help streamline the application process.
Before applying, look at the interest rate and calculate how much the loan will cost. The Federal Reserve estimates the average 24-month personal loan to have an annual percentage rate (APR) of 9.5%. The APR includes the interest rate and the fees charged by the lender expressed as a percentage.
You also want to determine how long you have to pay back the loan. Most personal loans offer terms that range from six months to seven years. Remember that if you choose a longer-term loan, your monthly payments will be lower, but you’ll end up paying more in accumulated interest. Shorter-term loans offer lower interest rates.
When it comes to personal loans in Bergen and Passaic County, Greater Alliance makes it easy. Call our financial experts today to guide you through the loan application process at 201-599-5500 ext 280 or visit our website for more information. We also have other blog articles that you will find valuable. We are committed to helping you take charge of your finances.