The five types of loans you should know about

When you want to borrow money, you have a wide range of available instruments. Their choice depends on your circumstances and needs. Lenders did not create loans equally.

The first things you should factor in are:

  • your money requirements,
  • the interest rates and payment terms you consider best for you.

Let’s see today five types of loans to help you with your endeavours.

1. Personal Loans

They are one of the most popular instruments available in the current financial market. Personal loans are “unsecured.” They do not require a cash advance or collateral (such as your home or your car). They are most useful for making big purchases. However, do keep in mind that unsecured loans may come with higher interest rates.

The most common scenarios when you might ask for a personal loan revolve around:

  • large home improvement projects,
  • medical bills,
  • moving operations,
  • wedding expenses,
  • holidays,
  • and even debt consolidation.

How Personal Loans Work

You can borrow large sums of money in a relatively short time, with repayments scheduled for a long period. Before you take the first bank’s offer on a personal loan, make sure you understand your annual percentage rates (APRs). More important even than the interest rate, APRs need your attention and scrutiny. They often reflect arrangement fees and other costs.

What else you should know about personal loans:

  • Most personal loans function based on fixed monthly interest rates; however, check to make sure, as some come with variable interest rates;
  • You can take a personal loan to consolidate several debts or pay off your credit cards.  This is not a risk-free procedure. You might end up paying more overall, due to the lengthening of your loan period;
  • If you have a poor credit history, take your time and use comparison websites and calculators to make the best choice. You may end up paying a lot more with a poor credit score.
  • You can improve your credit score by taking up a small personal loan. However, you need to be punctual with your monthly payments. If you’re late with them, you may end up with bad credit.

When it comes to personal loans, the market is rich in offers. Shop around until you find the best provider able to offer you the cheapest APR.

2. Payday Loans

Unsecured type of loan as well, payday loans are short term loans with no required collateral. A payday loan provides you with small amounts of money quickly. Some organizations can lend you the cash within the day of the request.

A payday loan comes with a high-interest rate because it is an “emergency loan.” It can help you solve a crisis or go through a rough patch until your next payday. In other words, such loans are short-term and come with lump-sum payments.

How Payday Loans Work

When you need cash very quickly to solve an urgent problem, payday loans are your go-to solution. The maximum amount you can access via this instrument is smaller than those available via personal loans. But you can have the money within the hour. If you are in a pinch and you cannot use other types of credit, payday loans can save the day.

What else you should know:

  • To repay the loan, you allow the lender to withdraw the borrowed amount plus fees directly from your account on salary day;
  • Alternatively, some lenders also agree with post-dated checks;
  • One disadvantage consists in the high rates and fees some lenders practice. Before you ask for money to cover urgent expenses, take your time to shop around.
  • Some lenders can offer you a payday loan even if you have a poor credit history.

To make an informed decision about payday loans, you should do your homework on how they work in general. For example, take into consideration that you can access a payday loan even if you have a poor credit score. The most important thing is to pick a trustworthy company that can offer transparent services.

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3. Title Loans/Auto Equity Loans

Auto equity loans (known as “title loans” in many parts of the world or car loans) are secure loans. It means you have to put your car as collateral.

A common practice in the United States, U.K., and Europe, auto loans allow you to access money against your car’s value. The loan amounts vary – together with fees, representative APRs, and reimbursement periods – but the basic principles are the same.

How Title Loans Work

Just like payday loans, auto equity loans fall under the “emergency loan” umbrella. However, if you own your car, and you need immediate cash to solve a crisis, these loans can help you get out of the woods. Here are some crucial things you need to know about such instruments:

  • They are one of the fastest solutions to borrow quick cash (even up to 50% of your car’s value);
  • When you receive approval for this type of loan, (it is a fast procedure, and many lenders give you the money despite not-so-great credit history), you hand over the car title until you pay back the full loan and its attached interest and fees.
  • They come with two significant risks: the APR can be huge (think in terms of three digits) and, if you fail to pay your debt, the lender can repossess your car.

Auto equity loans have become more and more popular in the western world. Nevertheless, before you hand over your car title to a lender, do your homework and shop around for the best offers.

4.  Secured Personal Loans

Just as their name suggests, these instruments require you to put collateral on the line, to “secure” the loans. Usually, the guarantees consist of assets such as cars, property, bank deposits, etc.

One of the paramount advantages of such loans is that the interest rates are lower in comparison to unsecured loans. The asset backing them up makes things less risky for the lender.

How Secured Personal Loans Work

You may need such a loan for significant expenses and investments, and you want to pay it back over the years while saving money on interest. Most banks and financial organizations offer such types of loans. You need to go through an approval process. Make sure you can reimburse the loan and its fees.

The main issue with secured personal loans is that you are vulnerable to a potential loss of assets and property. The seizing of your collateral is not something you want. Before you commit to such a loan,

  • shop around,
  • look for low APRs,
  • understand your rights,
  • and make sure you are up for the task.

5. Home Equity Loans

These loans work best when you need large sums of money. You have to pay back in years (you can think of decades). A home equity loan is a secured personal loan. It means you put your house on the line as collateral. One of the most prevalent types of credits on the market, it is also one of the trickiest.

Before you enter such a long-term relationship with a lender, you should know that:

  • Your interest rates with home equity loans are typically lower than with most types of unsecured personal loans; you still need to pay attention to APRs, reimbursement periods, hidden fees, and so on;
  • You may lose the place you live in if you default on this type of loan. A bank may foreclose on your home if you fail to repay. It is a risk that not many people are willing to take.

Since home equity loans come with such a burden, they also come with lengthy contracts and agreements. Our advice is to:

  • update your legalese,
  • compare multiple offers,
  • use interest rate calculators,
  • and discuss matters with a financial advisor.

If you are not sure you can budget this loan, you should consider other types of credit.

What other types of loans do you know? Have you used any of the ones we described? Which one did you consider the better choice for your needs?

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