Overview
A personal loan is a versatile financial tool you can use for a variety of expenses, such as debt consolidation, home renovations, and medical bills. In most cases, you’ll receive a lump sum of cash upfront and repay it with interest through fixed monthly payments.
As you shop around, you’ll find that not all personal loans are created equal. There are different types of loans, and the right one depends on a few factors, such as your unique financial profile and what you hope to do with the funds.
Key Takeaways
You can choose from unsecured personal loans, secured personal loans, debt consolidation loans, home improvement loans, medical loans, and joint or cosigned loans.
Stay clear of payday loans, pawnshop loans, title loans, and 401(k) loans as these options usually come with high rates and significant financial risks.
Before you commit to a personal loan, do your research and compare all your options so you can find the best deal for your specific needs.
6 Personal Loans to Explore
Below, we’ll break down the different personal loans on the market so you can decide which one(s) makes the most sense for your particular situation.
1. Unsecured personal loans
Consider one if: you have good credit and don’t want to put your assets on the line.
Most personal loans are unsecured, meaning they don’t require collateral or an asset you own. If you apply for an unsecured loan, a lender will look at your credit and income to determine your eligibility and terms. While it’s possible to get approved for an unsecured loan with fair or bad credit, you’ll likely have fewer options and have to settle for higher rates.
2. Secured personal loans
Consider one if: you don’t have the best credit and are okay with putting up collateral.
Secured personal loans do require collateral, such as cash in a savings account or certificate of deposit (CD). The caveat with this option is if you default on the loan, the lender has the right to seize your collateral. Since a secured loan is less risky for lenders, it’s usually easier to qualify for than an unsecured loan and may come with lower rates and/or higher limits.
3. Debt consolidation loans
Consider one if: you want to repay high-interest debt and potentially save some money on interest.
Debt consolidation loans let you consolidate high-interest debt, such as credit card or auto loan debt, into a single monthly payment. Not only can a debt consolidation loan streamline the payoff process, it may also help you save on interest, as long as you can lock in a lower rate than the rates you’re currently paying.
Home improvement loans
Consider one if: you hope to fund a home renovation, such as a kitchen remodel or new roof.
Home improvement loans are specifically designed for home improvement projects of all shapes and sizes. If you’re looking for a large sum of cash to pay for materials and/or labor but don’t want to drain your savings, it can come in handy. You can pay off your loan over time through set monthly payments.
Medical loans
Consider one if: you need to cover medical expenses like medications or surgeries.
Medical loans are offered to help pay for planned and unplanned out-of-pocket medical expenses that may not be covered by your health insurance plan. Instead of keeping tabs on multiple medical bills with varying payments and due dates, you can consolidate into a single payment, ideally with a lower interest rate.
Joint or co-signed loan
Consider one if: you have bad credit and a trustworthy cosigner or co-borrower with strong credit.
If your credit is shaky, you may find it easier to qualify for a desirable loan with another person. With a joint loan, you and your co-borrower both have access to the funds and are equally responsible for repaying the loan.
A cosigned loan, however, is when you receive the funds and are required to pay them back but the cosigner will step in and cover your payments if you default. Note that your co-borrower or co-signer should have excellent or good credit and stable income.
Personal Loans to Avoid
Personal loans can be a real lifesaver when you’re in a financial pinch or simply want to keep your savings in check. However, there are some loans that can be difficult to repay and may actually worsen your financial situation, including:
Payday loans
Payday loans are intended to hold you over until your next payday. There are no credit checks, but you will have to agree to exorbitant interest rates, often in the triple digits. Plus, payments are usually due by your next paycheck, within two weeks or so.
Pawnshop loans
Available at pawnshops, pawnshop loans are secured, short-term loans that let you borrow between 25% to 60% of the value of your pawned item, such as a guitar or diamond ring. Interest rates are typically sky-high and if you default on your loan, the pawnshop will keep your item.
Title loans
Title loans offer fast cash in exchange for your car’s title. These short-term loans almost always come with interest rates. If you can’t make your payments, the lender can repossess your vehicle, making it difficult for you to get to where you need to go.
401(k) loans
401(k) loans may be an option if you have a 401(k) retirement account. You borrow funds from yourself and pay them back with interest, typically over a period of five years. Even if you’re decades away from retirement, this type of loan can derail your future goals and leave you with costly penalties if you can’t repay it.
The Point
Once you decide on the ideal type of personal loan for your unique situation, shop around and compare your options. Most lenders will let you prequalify and check potential loan offers without any impact to your credit.
In most cases, you can apply for a loan online and get approved that same day, the next day, or within a few business days. Upon approval, the lender will likely disburse your funds via direct deposit, and you’ll need to repay them based on your loan terms.
by your friends at The Daily Navigator
