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What Are Personal Loans?

Only 29% of Americans are considered financially healthy. If the average person has an emergency expense, most either don’t have enough money in savings and/or don’t earn enough money to cover that cost.

But more people have another financing option: loans.

Loans can help cover the cost of emergency expenses or even specific expenses, such as a car. These loans are called personal loans and there are many types of loans out there. You pay back the loan over a certain period, usually with added interest rates.

When you take out a personal loan, a financial institution is letting you borrow a certain amount of money. You pay this loan back in monthly installment payments, usually over some time. Personal loans also come with an interest rate — anywhere between 6% and 36%.

Most personal loans are unsecured (which we will go over more later), but there are personal loan options that are backed by collateral. While there are loans available for specific purchases, you can borrow a personal loan for any reason.

Why choose a personal loan over a credit card? Personal loans usually come with higher fund amounts and lower interest rates than credit cards.

Your lender will determine your eligibility by looking at your credit score (but some loans accept those with bad credit scores or don’t check your credit score), your repayment history, and your income (some may even require statements from your bank account). Secured loans are the easiest to qualify for, though you will need to put down collateral.

Many financial institutions offer personal loans. These include banks, credit unions, and online lenders.

Before signing up for a loan, it’s recommended you conduct plenty of research.

Look at a few different lenders and compare their APR rates, fees, and eligibility requirements. You should also fill out a loan application for different lenders to compare your options — you only receive the funds when you agree to their contract.

How Do Personal Loans Work?

With personal loans, you borrow a fixed amount of money and pay it back in monthly payments. The payments are usually fixed and every personal loan has a payback period — usually lasting between 12 and 84 months.

Lenders work with your credit score, your repayment and credit history, and your salary. You may have to put down collateral, depending on the type of loan you’re taking out. Your lender will approve your loan amount based on these factors and how much you need to borrow.

What if you need more money after you pay off the loan? You’ll have to apply for a new loan. Your account closes after you pay off the loan.

Do personal loans have a prepayment penalty? Fortunately, most personal loans don’t. It’s still important you read your loan contract carefully and discuss all terms with your lender.

Secured vs. Unsecured Personal Loans

When searching for a personal loan, you have the option to choose a secured or an unsecured loan.

A secured loan has collateral or something that’s connected to the loan. Title loans are a perfect example, which we will discuss later in the article.

If you opt for a title loan, your car title is connected to the loan. In the event you can’t pay off your loan, your lender can take your car.

An unsecured loan has no collateral. Most personal loans are unsecured, but there are specialty loans that do require collateral.

Fixed vs. Variable Rate Personal Loans

Your loan can have two different types of APR rates: fixed or variable. A fixed-rate won’t change. Most personal loans have fixed interest rates, though variable rates are also an option.

Variable rates can increase or decrease throughout the life of your loan, depending on the market. All variable rates have a cap where the rate can’t go past.

Are There Loans for Poor Credit?

Your credit score impacts your creditworthiness. If you have a great credit score, you’ll get the lowest rate on your loan. Low credit scores tell lenders you’re a risky borrower. This doesn’t mean you won’t qualify for a loan. You’ll just have to find the right lender and apply to a loan that works with your financial state.

Two poor credit loan options include no credit check installment loans and payday loans. Installment loans have fixed monthly payment amounts and some lenders won’t check your credit score. Payday loans only let you borrow the amount you’ll receive on your next paycheck.

Keep in mind, both loan options could have high-interest rates, strict repayment periods, and additional fees, such as an origination fee.

The lender you choose also impacts your loan eligibility. For example, you’ll have an easier time qualifying for a loan from a credit union than a traditional bank.

What Are the Different Types of Personal Loans?

There are lots of different loans available. Before you sign up for a loan, take a look at your options and know which is the best loan for you.

Installment Loans

We briefly described installment loans in the previous section. But since installment loans are so common, it’s essential to devote a whole section to this loan type.

With installment loans, you borrow a set amount of money and pay them back in monthly installments, also called loan terms. You and the lender agree on the borrowed amount and the time you have to pay back the loan. Some lenders offer autopay to ease the payback process.

Installment loans are diverse loans and could be used to describe many loan types, including mortgages and auto loans.

Payday Loans

We also mentioned payday loans, but we must describe these loans in detail.

With payday loans, you borrow the average amount you receive on your normal paychecks.

When you apply for a payday loan, you include paystubs for your last few paychecks. Your lender may also look at your financial history and your credit score (though there are lenders who won’t look at your credit score).

Payday loans have short-term payback periods and usually, come with high-interest rates.

Title Loan

If you’re looking for a secured loan and own your car, you can get a title loan. With title loans, you borrow your loan against your car. While these loans are great if you need financing, they usually come with high fees — and you may lose your car if you can’t pay off the loan.

Consolidation Loans

Do you have several loans you’re paying off? Are you in credit card debt? You can take a consolidation loan to help pay them all off.

Consolidation loans, also called debt consolidation loans, are beneficial because they usually come with lower interest rates and they simplify the loan pay-off process. They often come with longer terms, lowering your monthly payments. There are also specialized consolidation loans, such as student consolidation loans.

While they’re not for everyone, consolidation loans can help you take control of your debt and achieve better financial health.

USDA and Mortgage Loans

There are several home loans out there, but one of the most affordable is the USDA loan program. If you plan on buying a home in a rural area, these loans are convenient because you don’t need to put a down payment on the home.

These loans are convenient for those who don’t have money for a down payment, don’t qualify for a traditional mortgage, and they even offer low-interest rates. Qualifying for a USDA loan is easy and they’re very accessible.

There are some downsides to taking a USDA loan. For example, you won’t be able to take a home equity loan out on your home.

Auto Loans

Many people decide to take out an auto loan when they buy a car. With auto loans, you put a down payment on a car and pay off the rest in fixed monthly payments with added interest.

Many factors impact these payments, including the cost of the car, whether it’s new or used, the repayment period length, your credit score, your repayment history, and the interest rates you qualify for.

Student Loans

Student loans are financing meant to help a student pay for college. Student loans cover expenses such as tuition, books, school supplies, and even living expenses.

There are downsides of student loans — as of 2020, the country’s student loan debt is now at almost $1.6 trillion. Student loans cause students, often young, to be in serious debt and it can take years to pay off the loan.

But there are benefits to taking out a student loan. They offer convenient financing options, usually come with low-interest rates, and students usually don’t pay off these loans until they graduate college.

There are also more student loan options now than ever. These include:

• Federally-funded loans
• Private loans
• Loans for students with financial needs

Besides, some loans include borrower protection, assisting students in severe debt.

There are many options where students can get their student loans. While banks usually require a good credit score and a specific salary (or a co-signer), federal loans usually have fewer restrictions.