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 bestfor 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 apersonal loan revolve around:
- large home improvement projects,
- medical bills,
- moving operations,
- wedding expenses,
- 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. Sometimes, some home improvements are necessary and can’t be pushed back. At Victorian plum, you can be assured that design and installation comes with 0% APR finance.
What else you should know about personal loans:
- Most personal loans function based on fixed monthlyinterest rates; however, check to make sure, as some come with variableinterest rates;
- You can take a personal loan to consolidate severaldebts or pay off your credit cards. Thisis not a risk-free procedure. You might end up paying more overall, due to thelengthening of your loan period;
- If you have a poor credit history, take your time anduse comparison websites and calculators to make the best choice. You may end uppaying a lot more with a poor credit score.
- You can improve yourcredit score by taking up a small personal loan. However, you needto be punctual with your monthly payments. If you’re late with them, you mayend up with bad credit.
When it comes to personal loans, the market is rich inoffers. Shop around until you find the best provider able to offer you thecheapest APR.
2. Payday Loans
Unsecured type of loan as well, payday loans are shortterm loans with no required collateral. A payday loan provides you with smallamounts of money quickly. Some organizations can lend you the cash within theday 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 urgentproblem, payday loans are your go-to solution. The maximum amount you canaccess 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 youcannot 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 withdrawthe borrowed amount plus fees directly from your account on salary day;
- Alternatively, some lenders also agree with post-datedchecks;
- One disadvantage consists in the high rates and feessome lenders practice. Before you ask for money to cover urgent expenses, takeyour time to shop around.
- Some lenders can offer you a payday loan even if youhave a poor credit history.
To make an informed decision about payday loans, youshould do your homework on how they work in general. For example, take intoconsideration that you can access a payday loan even if you have a poor creditscore. The most important thing is to pick a trustworthy company that can offertransparent services.
3. Title Loans/Auto Equity Loans
Auto equity loans (known as “title loans” in manyparts of the world or car loans) are secure loans. It means you have to putyour car as collateral.
A common practice in the United States, U.K., andEurope, auto loans allow you to access money against your car’s value. The loanamounts vary – together with fees, representative APRs, and reimbursementperiods – but the basicprinciples are the same.
How Title Loans Work
Just like payday loans, auto equity loans fall underthe “emergency loan” umbrella. However, if you own your car, and you needimmediate cash to solve a crisis, these loans can help you get out of thewoods. Here are some crucial things you need to know about such instruments:
- They are one of the fastest solutions to borrow quickcash (even up to 50% of your car’s value);
- When you receive approval for this type of loan, (itis a fast procedure, and many lenders give you the money despite not-so-greatcredit history), you hand over the car title until you pay back the full loanand its attached interest and fees.
- They come with two significant risks: the APR can behuge (think in terms of three digits) and, if you fail to pay your debt, thelender can repossess your car.
Auto equity loans have become more and more popular inthe western world. Nevertheless, before you hand over your car title to alender, do your homework and shop around for the best offers.
4. Secured Personal Loans
Just as their name suggests, these instruments requireyou to put collateral on the line, to “secure” the loans. Usually, theguarantees consist of assets such as cars, property, bank deposits, etc.
One of the paramount advantages of such loans is thatthe interest rates are lower in comparison to unsecured loans. The assetbacking 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. Mostbanks and financial organizations offer such types of loans. You need to gothrough an approval process. Make sure you can reimburse the loan and its fees.
The main issue with secured personal loans is that youare vulnerable to a potential loss of assets and property. The seizing of yourcollateral 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 alender, you should know that:
- Your interest rates with home equity loans aretypically lower than with most types of unsecured personal loans; you stillneed to pay attention to APRs, reimbursement periods, hidden fees, and so on;
- You may lose the place you live in if you default onthis type of loan. A bank may foreclose on your home if you fail to repay. Itis a risk that not many people are willing to take.
Since home equity loans come with such a burden, theyalso 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, youshould consider other types of credit.
What other types of loans do you know? Have you usedany of the ones we described? Which one did you consider the better choice foryour needs?