Whatever you may need it for – from buying a car to covering an emergency expense – personal loans can provide funds when you need them most. However, if this is your first personal loan, you ought to know the four main types of personal loans, as well as their pros and cons. Let’s look at the 4 types of loan.
Personal loans can be used for just about any purpose. You can take a personal loan of anywhere from a few hundred pounds to thousands of pounds. Different lenders have different eligibility criteria for the approval of personal loans. These criteria are generally quite easy to meet.
When applying for the personal loan, you may be required to state what you need the funds for. However, the purpose of the funds rarely has a bearing on whether or not you get approved.
Lenders approving you depends majorly on how the lender assesses your risk. Once approved, lenders rarely place restrictions regarding what you can spend the funds on. In most cases, you will have between one and five years to repay the loan.
There are four main types of personal loans available, each of which has its own pros and cons.
Unsecured personal loans are offered without any collateral. Lenders approve unsecured personal loans based on your credit score. A good credit score will make it easier to get approved. Because there is no collateral involved, these loans are riskier for lenders. They offset this high risk by imposing higher interest rates on unsecured loans.
Secured personal loans are backed by collateral. Lenders offer unsecured personal loans against your vehicle, personal savings, or any other valuable asset. If you default your loan, the lender can seize whatever asset you have put up as collateral. Because the risk is lower, you will a lower interest rate on these loans.
With fixed rate loans, your interest rate and monthly payments stay the same throughout the life of the loan.
With variable rate loans, the interest rate can rise or fall depending on prevailing market conditions. However. there is usually a cap on how much the rate can change over a specified period of time. These loans usually have a lower APR as compared to fixed rate loans. Variable rate loans.
The key is to find a loan that works for you. Understanding the features of the different types of personal loans and the pros and cons of each can help you choose one that is right for you.