5 different types of personal loans you should consider

When it comes to financing, it pays to pick the best option for your situation. (iStock)

Personal loans are the fastest-growing type of consumer debt, according to Experian, and perhaps you’ve considered applying. Personal loans can be an effective way to consolidate your other debt, pay for an unplanned expense or make a large purchase. But is a personal loan for you?

Continue Reading Below

Before you sign on the dotted line make sure the loan and it’s terms are right for you.

Here are some options to consider:

1. Unsecured loans

An unsecured personal loan is an installment loan that is paid back in monthly increments over time. Since it isn’t backed by collateral, this type of loan can be easier to acquire if you have good credit.

Loan amounts depend on your credit score. Lenders typically offer personal loans between $1,000 and $50,000 -- or as much as $100,000 to borrowers with excellent credit. Loan lengths usually range between one and six years.

HOW TO GET A $5,000 LOAN

Personal loan interest rates typically range between 5 percent and 36 percent, depending on your credit score. Since the lender takes a risk with an unsecured loan, they may charge higher interest rates. This type of loan can be a good option for someone with good credit who wants a regular monthly payment.

2. Secured loans

A secured loan is an installment loan that is backed by collateral, such as a car, savings account or another asset. If the borrower defaults on the loan, the lender can seize the asset to cover all or a portion of the balance.

Secured loans are less risky for lenders, and they may offer lower interest rates, making it one of the cheapest personal loans available. In addition, lenders may be more flexible about their credit score requirements, which means it can be one of the best personal loans for poor credit.HOW TO GET A PERSON LOAN IN 7 EASY STEPS

3. Cosigned loans

A cosigned loan is an unsecured or secured loan that has more than one party guaranteeing repayment. If you have low or no credit history, a lender may ask you to have a cosigner, who will assume and pay the loan if you default. For the lender, a consigner is a form of insurance. Having one may improve your chances of being approved as well as provide better terms for the loan.

HOW TO FIND A COSIGNER FOR A LOAN

The advantages of taking out this type of loan go to the borrower who can qualify for more money or better terms. It’s important to note that the cosigner has disadvantages. The loan will show up on their credit report and missed or late payments can negatively impact their score. Carefully consider this type of loan and understand that the financial risk associated with it has the potential to damage your relationship.

4. Debt consolidation loans

A debt consolidation loan combines multiple debts into a single loan with a single monthly payment. Borrowers can use it to pay off credit cards, medical bills, payday loans, loans from family and friends, and other personal loans.

Debt consolidation loans can help you reduce your overall monthly costs into one affordable payment. A pitfall that consumers can encounter after getting a debt consolidation loan is the temptation to run balances back up on credit cards or other forms of personal loans. This personal loan can be a good option if you have the discipline to control your debt and if it offers lower APR than your existing debts.

5. Personal line of credit

Finally, you may qualify for a personal line of credit. This loan is a revolving form of credit, similar to a credit card. In contrast to an installment loan that involves a lump sum repaid in monthly payments, borrowers are given access to a line of credit up to a certain amount that can be borrowed as needed. Interest is charged only on the outstanding balance.

A personal line of credit can be put in place to cover unplanned expenses for emergency personal loans or fluctuations in income. Some lenders may offer a secured line of credit backed by an asset. And some allow you to set up a line of credit that is connected to your checking account to cover overdrafts.

DOCUMENTS REQUIRED TO APPLY FOR A PERSONAL LOAN

Making the right choice

Before you choose a personal loan, spend time exploring your options. More than a fifth of respondents to a 2020 U.S. News & World Report survey said they didn’t do any research before applying. Since rates and terms can vary greatly, this has the potential to be a costly mistake. Know your options and understand what you’re signing. A personal loan should help your financial situation, not cause damage or put you at risk later.