How BadCredify Simplifies Understanding Different Types of Consumer Loans

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( — February 27, 2024) — Not all loans are identical. Before you borrow money, it’s vital to select the loan type that best fits your needs.

Your credit score plays a significant role in loan comparison. It influences approval chances and potential interest rates. Janice Myers, a senior editor for BadCredify, is here to guide you through different types of loans, highlighting their pros and potential pitfalls to consider.

Unsecured Personal Loans

Unsecured loans don’t involve putting up any valuable assets as security against default. You can use personal loans as you need — from funding wedding expenses to consolidating debt.

Better For: Big Expenses and Debt Consolidation

Tackling high-interest credit card debt can be more efficient with a personal loan. Start by requesting a loan amount that matches your credit card debt. Following approval for the total amount, allocate the loan funds to clear your credit cards, subsequently focusing on monthly payments towards the personal loan.

Based on your credit rating, a personal loan could provide a more attractive interest rate compared to your credit card, potentially offering significant savings. It’s useful to know the average rate for consolidating debt.

Considering a personal loan is a wise choice for financing major purchases. Substantial costs like medical bills, relocation expenses, or home renovation projects are better covered with personal loans.

Be Wary: Interest Rates and Credit Checks

Since unsecured personal loans don’t necessitate collateral, lenders often look to your credit scores and reports to determine your loan eligibility. In most cases, people with higher credit scores are afforded more advantageous loan terms.

Even with a fair or bad credit score, you can qualify for an unsecured personal loan. However, you should compare multiple options to ensure the interest rate and monthly payment fit your budget.

Secured Personal Loans

To acquire a secured personal loan, you must present some form of additional security. They can be some of your valuable assets like a car, a home, or a certificate of deposit.

Better For: Lower Interest Rates

Secured loans generally have lower interest rates compared to unsecured personal loans. Lenders consider them less risky due to the assets backing the loan. If you’re comfortable with collateral and sure about your repayment ability, a secured loan might be a way to save money on interest costs drastically.

Be Wary: The Risk of Losing Your Assets

If you fail to repay your personal loan in time, your lender has a lawful right to seize collateral assets. Be realistic about your ability to repay.

Joint Loans and Loans with a Co-Signer 

A personal loan might require a co-signer if you can’t qualify individually. Your co-signer is expected to have a reliable credit history and be prepared to settle the remaining debt if you default, but they won’t have rights to the loan funds.

Numerous lenders provide joint loans where both applicants can use the loan funds. Similar to co-signed loans, both individuals bear the responsibility for making payments. A co-borrower with good or excellent credit enhances the likelihood of loan approval. 

Better For: Securing a Large Amount of Money

A joint loan might be the perfect solution for couples owning a home and considering improvements. With more than one person contributing income, you may access a higher loan or better credit opportunities.

Be Wary: Shared Responsibility

While a joint loan’s shared responsibility can lead to more significant loans, it also poses the challenge of needing full repayment — irrespective of personal relationship issues.

Fixed-Rate Loans

Fixed-rate loans maintain a steady interest rate for their entire term. Your monthly payments stay the same, with each installment contributing to both interest and principal.

Better For: Payment Control and Certainty

Fixed interest rates ensure a predictable repayment scenario for consumers, where monthly loan or mortgage payments remain steady throughout the loan term.

Be Wary: Higher Interest Rates 

Fixed interest rates usually surpass adjustable rates in terms of the amount. Given the prevailing interest rate conditions, loans with fixed rates can bear higher interest rates than those with adjustable rates.

Variable-Rate Loans

Interest rates on variable-rate loans are subject to change, yet they frequently begin at a rate lower than their fixed-rate counterparts.

Better For: Getting Better Rates and Terms

It’s possible to secure a lower interest rate with a variable loan compared to what a fixed-rate loan offers.

Be Wary: Rates May Change

The risk with variable rates is that they might go up. Planning financially for variable-rate loan payments is trickier since they can change.

Payday Loans

Payday loans are usually repaid on your next payday, but the exact due time varies. They typically have very high-cost APR. States regulate payday lenders in various ways, resulting in differences in loan amounts, fees, and the repayment period according to your location. In some regions, payday lending is forbidden at all.

Loan repayment generally requires you to write a post-dated check or to permit the lender to auto-withdraw the loan amount and any applicable interest or fees from your bank account.

Better For: Last Resort Emergency Cash

Typically not exceeding $1,000, payday loans can be a practical option if you’re in a tight spot without savings or more affordable credit alternatives.

Be Wary: Very High Interest Rates

The substantial fees of payday loans often result in annual percentage rates close to 450%, far exceeding the usual 10% to 18% APRs of personal loans for terms of two years.

Credit Builder Loans

Your credit score is very important for loan lenders; they consider it as a measurement of your creditworthiness. A credit builder loan serves exactly for people with a bad credit history or no history at all. These loans differ from traditional ones, and they are usually small — from $200 to $1,000.

Better For: Improving Your Credit Score

Unlike standard loans offering lump sum or assets, this loan type secures the amount in a bank account, available post-repayment. For new credit builders, the gradual process can be motivated by the promise of funds access.

Be Wary: Credit Builder Loans Are Hard To Find

Credit builder loans are not very common. You might have better chances of finding credit builder loans at smaller financial institutions like credit unions. 

Private and Federal Student Loans 

Student loans are key in covering costs for college and graduate education. They are offered by both federal and private entities. Federal student loans are particularly appealing due to their options for deferment, forbearance, loan forgiveness, and income-dependent repayment plans.

Better For: Students with No Credit History

Federal student loans typically don’t entail a credit check for applicants, making them accessible for college students who lack a credit history. While co-signers are standard for many private student loans, some lenders forego this requirement.

Be Wary: The Sum May Be Insufficient

There’s usually an annual limit on what you can borrow with student loans. With the combined expenses of tuition, fees, supplies, living costs, etc., you might have to look for extra funds to cover your degree.

Car Title Loans

For car owners struggling with credit, auto title loans are a viable choice. Your credit score matters less to lenders than having collateral. You can secure a loan up to half the value of your vehicle, but be wary of the risks like losing your car, short loan terms, and high-interest rates.

Title loans often feature APRs that reach the triple digits. Getting one requires you to hand over your car title until the entire loan and fees are paid back. You can usually get up to $6,000 and require repayment within 15 to 30 days.

Better For: Moderate Amount of Money with Quick Deposit

When your car is fully yours, and you’re out of borrowing alternatives, a title loan can provide you with emergency cash you’d normally not be able to access.

Be Wary: Potential Car Loss

Should you fall behind on repaying your loan based on the agreed terms, you might incur additional fees, and the lender will continue holding your car title, which could eventually lead to repossession.

Pawn Shop Loans

You can borrow against your valuables with a pawn shop loan where your credit score is irrelevant due to the assets you provide. It’s similar to auto title loans; the only difference is the items you give as security assets. Commonly pawned items are electronics, musical instruments, and jewelry. 

There’s usually a 31-day period to repay the loan and recover your item, or else the pawnbroker may sell it upon default.

Better For: Little Sum of Money with No Credit Check

Pawn shop loans usually average around $200. If securing a conventional personal loan seems doubtful, ponder over a pawn shop loan. There’s no credit check necessary, and they tend to be less hazardous than payday loans or auto loans.

Be Wary: They Could Sell Your Possessions

Expect additional fees, including storage, insurance, or costs for extending the loan term. Should you fail to repay the loan in the agreed time, the pawn shop may put your items for sale. 

Payday Alternative Loans

Federal credit unions sometimes offer a payday alternative loan, a short-term loan option aimed at being more affordable than a regular payday loan. PALs have loan amounts ranging from $200 to $1,000 and feature extended repayment terms from one to six months, in contrast to the few weeks usually offered by payday loans.

Better For: Lower Interest Rates and Terms

Consider a payday alternative loan before a payday loan if you want to save money on interest rates. Federal credit union application fees are capped at a maximum of $20. In contrast, conventional online payday loans usually have a $20 fee for every $100 borrowed.

Be Wary: Membership Terms and Requirements 

Eligibility for a PAL requires at least one month of membership in a federal credit union. If you need immediate financial help and aren’t a member of a credit union, consider other variants.

Mortgage Loans

Likely the most significant loan you’ll secure in your lifetime — a mortgage loan allows for purchasing a home and accumulating equity. There are several types of mortgages exist:

  • USDA loans — for rural homebuyers with limited income;
  • VA loans — for veterans and active-duty military personnel;
  • FHA loans — for people with a low to moderate income range.

The majority of mortgage loans are repaid for up to 30 years, though you can find shorter options with both fixed or variable interest rates.

Better For: Buying a Home

You pay off the mortgage gradually each month, and if the interest rate is favorable, these monthly payments might be significantly lower than the rent in your area.

Be Wary: Your Home Acts as a Collateral

As secured loans, your property acts as collateral. Defaulting your debt could cost you your acquired home.

Home Equity Loans

Your residence serves as the collateral for a home equity loan. The loan sum is calculated from the equity of your home — essentially, its value minus any mortgage remaining. Typically, the borrowing limit is 85% of your home’s equity. A minimum credit score of 680 is necessary, and timely repayments are vital for home security.

Better For: Personal Loan Alternative Option 

HELOC is risky, but equity loans have lower interest rates in comparison to unsecured loans. You are free to use home equity loan funds as you need, from car repairs to covering hefty medical bills. 

Be Wary: Possible Default

Prior to taking out a home equity loan, it’s crucial to determine if the payments fit within your financial limits. Defaulting might lead to foreclosure by your lender, leaving you potentially homeless.

Credit Card Cash Advances

Your credit card could offer a cash advance, which serves as a short-term loan drawn against the balance available on your CC.

Better For: Getting Cash

A cash advance is a good loan alternative if you need to pay at a place that doesn’t accept credit cards.

Be Wary: Fees and High-Interest Rates 

Be aware that a cash advance on your credit card may carry a different interest rate than typical purchases. Plus, interest commonly begins accruing immediately upon withdrawal, coupled with a probable processing fee.

Think Before You Borrow Money

Begin by crafting a budget to gauge what monthly repayment you can manage before borrowing money. If money problems persist, think about getting credit counseling or revisiting your spending habits.

FAQ | Different Types of Loans

What Are Debt Consolidation Loans?

Debt consolidation loans are usually referred to as unsecured personal loans, which are used to merge existing loans into one.

Which Loans Are Usually The Easiest to Get?

Emergency loans and payday loans typically are the easiest ones to acquire, but they are considered to be one of the most expensive in the end.