Too many people find themselves in the position where they need to take out a loan but have no idea what sort of loan is best for them and their situation. There are lots who don’t even realise that there are many different types of loans either, with some being more suited to them than others. If you’re one of those people, don’t worry! This guide will tell you all about the different types of loans and what they offer you, so you can make a more informed decision about your next steps in taking out a loan.
- Unsecured And Secured Personal Loans
There are many different reasons that a personal loan would be useful for you, no matter whether it is unsecured or secured. For example, you could use it to cover wedding costs, to help with home renovation expenses, or even for purchasing a car.
There is a big difference between unsecured and secured personal loans, however. Unsecured personal loans mean you don’t have to give collateral as insurance for lenders, whereas this is a requirement for secure loans. Usually, secured loans are used by lenders who see you as a risk to lend to (which is indicated to them by a low credit score). More often than not, if you have a high credit score, lenders will be more likely to offer an unsecured loan as they trust you to keep up repayments.
For unsecured loans, the main benefit is that it helps with large purchases with minimal risk on your end, as you aren’t placing any important assets on the line to acquire this loan. However, you need to be careful with interest rates. Some lenders will have higher interest rates than others, so make sure to shop around for the best deal.
As for secured loans, a key benefit would be the lower interest rates that come along with them. Because there is a majorly important asset as collateral, lenders don’t see high interest rates as being particularly important to them. One downside to secured loans is that it is crucial you keep up repayments on time as you risk losing your car or even your house, both of which can be used as collateral if you don’t.
- Pawn Shop Loans
A loan type more common in the USA, pawnshop loans are a quicker borrowing option, with less of a difficult or long process than personal loans. It consists of bringing in a valuable item, for example, a necklace or a phone, and borrowing money equating to the value of the item.
Interest rates can be pretty high, and vary depending on the pawnshop you go to. Usually, you don’t get your item back until you have paid the full amount, and the time you have to repay the loan varies depending on what state you are in (in the USA). As well as this, if you don’t repay the loan in time, pawn shops can sell your items to customers. A key benefit of this, however, is that you don’t need a credit check so if you don’t qualify for other types of loans.
- Payday Loans
A payday loan is just one example of the many different short term loans available. They are high cost loans that tend to be due to be repaid by the next payday. Make sure to research the loan amounts, loan fees, and payment deadlines before you apply, as these can vary depending on where you live. One way that people repay the loan is by giving lenders the authority to automatically withdraw the amount borrowed (as well as any additional fees) on the due date.
This is a great way to get emergency cash when you’re short on any other options. It can be very useful if you’re in a bit of a bind and can’t access any cheaper forms, as well as if you don’t have any savings. However, payday loans can have high fees equating to around 400% in annual percentage rates (APRs) which is a lot higher than that of personal loans, which have been predicted to stop around the 10 or 11% mark, according to the Federal Reserve.
As well as these loans mentioned above, there are also another few important and popular loan types, such as:
- Title Loans: Pro- If you own your own car, you can usually collect a loan equating to between 25% and 50% of what your car is worth.
Con- You usually have to repay it between 15-30 days, otherwise your car could be repossessed.
- Home Equity: Pro- You can potentially borrow up to 85% of the equity of your home.
Con- If you default on this type of loan, you could find yourself without anywhere to live, as your house is used as collateral.
Hopefully, this guide has taught you the basics about the different types of loans available. Always remember to thoroughly research the loan before taking one out, otherwise, you could potentially find yourself in a bit of a difficult position.
