A Thorough Breakdown of different Personal Loans
You know you’re an adult when the thought of paying bills or creating a budget comes to your mind naturally. The biggest realization that you’ll have as an adult is to have clarity on managing your finances to reap the rewards later. And when it comes to a financial hand of help, a personal loan can be a great option to consider. In 2018, Fortune.com reported that personal loans surged to a record $120 billion high.
A personal loan is a kind of credit ideally used for a particular purpose, like buying a vehicle, financing a holiday, consolidating debt, or renovating a house. You borrow a certain amount and make regular repayments to your lender. By the end of your loan term (usually between one and seven years), your loan is completely repaid.
There is a range of lenders who offer different kinds of personal loans. Irrespective of the type of personal loan, you will incur interest and charges during the loan term. So, make sure that you are thorough with all the clauses of the documents. Here is everything that you need to know before you take a personal loan.
Fixed Personal Loan
A fixed personal loan comes with a fixed interest rate. Hence, your repayments will not change for the entire term of the loan.
“Fixed personal loans provide stability. In this case, you have a clear idea of exactly how much you have to repay each month and can take this into account when creating a budget”, suggests Alex Mason, a finance paper help expert from Allessaywriter.com.
- Repayments stay the same all through the term of the loan, thus making financial planning a lot more convenient.
- You can avoid the stress of rising rates.
- The rates of fixed personal loans are generally higher than variable ones.
- This type doesn’t allow applicants to repay the loan early. In this case, additional charges may apply.
- You may miss out on low-interest rates if market rates fall.
Variable personal loan
The interest rate for this type of personal loan is subject to change. Therefore, your repayments may differ during the tenure of your loan.
Many variable personal loans let you make extra repayments so that you can repay the loan at the earliest as per your convenience. Such loans also allow you to access these funds through a redraw facility and use the funds for other purposes.
- When the interest rates fall, your repayment amount will be lesser.
- You enjoy lower fees and rates as compared to fixed interest personal loan.
- Hard to budget as repayments will fluctuate as per the changing rates.
- When interest rates increase, your payment amount will increase too.
Secured personal loan
This form of personal loan requires you to put up an asset as collateral security. Your security can be a car, jewelry, business equipment, etc.
If you miss out on the repayments and fail to make proper arrangements with your lender, they have the legal right to forfeit the security asset and take possession of it. Then the lender can sell the asset to recover their money.
- This form of personal loan involves lower interest rates because the lender has less risk.
- Secured loans are more convenient when you take loans from reputable lenders like banks and other financial institutions.
- If you fail to repay the secured loan, you could lose your asset.
Unsecured personal loan
You do not need to provide an asset as collateral security when it comes to unsecured personal loans. This makes the transaction more complicated, which is why the lenders set a steep interest rate. Moreover, if you’re unable to repay the loan, your lender can take legal steps against you to recover their money. According to stats published by the chamber of commerce, 19.1 million consumers currently have an unsecured personal loan.
With no proper security involved, you need to convince your lender that you can repay your loan. To increase your chances of being approved, some lenders let you appoint a guarantor. The guarantor provides security that the lender can forfeit when you fail to repay your loan.
- Unsecured loans ideally have lower interest rates than credit cards and also involves many “buy now, pay later” financing deals.
- This is a viable option to consider if you don’t have any assets.
- You have to bear the burden of hefty penalties for late payments.
- The lender may take proper legal action if you default on the loan.
- Most providers tend to charge higher fees and interest rates compared to a secured loan.
Debt consolidation loan
A debt consolidation loan amalgamates various loans into one. For instance, you may have two different personal loans and an outstanding balance on a credit card, each with a different lender. Debt consolidation loans will enable you to consolidate all three into one manageable (and possibly more affordable) loan.
Consolidating your debts into one loan with a lower interest rate can help you save your monetary resources.
- Lets you pay off all your debts faster with a competitive rate
- One regular payment as compared to several payments throughout the month
- These forms of personal loans make you vulnerable to fall into more debt, and it also makes you slip back into bad spending habits
An overdraft refers to a loan attached to a bank account, providing you with access to additional funds, up to an approved limit. By connecting the overdraft to your bank account, you’ll have easy access to these funds through online banking and ATM withdrawals.
An overdraft doesn’t come with a set repayment term, and you will only be charged interest on the credit that you use. It’s easy to splurge when you have an overdraft. So, apply for one only when you are in dire need of it and choose a credit limit that’s convenient for you to pay back.
- Access to additional money when times are tough
- Interest is only charged on what you use
- Interest rate, in this case, is higher than other types of personal loans
It’s vital to manage any credit you use wisely, which includes a personal loan. Personal loans can be beneficial when managed well. However, taking on debt should never be something you do lightly – or without considering your overall financial picture before you make the jump. Make sure you weigh all your options before making the final decision.
Author bio: John Mark has pursued his MBA in finance. He is a distinguished member of Allessaywriter and offers accounting paper help to students. He also dabbles into blogging and travelling.