When you listen to the term “personal loan”, unsecured personal loans with fixed rates may come to mind. But do you know there are different types of personal loans? There are guarantor loans, secured loans, unsecured personal loans, etc., with varying interest rates.
Let’s dig deeper into what are the types of loans available and what’s the difference between their terms and conditions. But before that, you must recognise your need to borrow and eligibility to repay the loan.
The eligibility differs from person to person. However, some common needs are identified that motivate people to take a personal loan.
Need to Borrow
People borrow for different reasons. Your need to borrow is the most deciding factor in determining the suitable type of loan. Which of the following common reasons to borrow do you identify with?
- Funding your wedding.
- Purchasing a luxury car or costly home equipment.
- Debt consolidation – putting all loans together into one loan.
- Going on a memorable holiday.
- Buying an expensive mobile phone.
- Filling the gaps in the down payment of a property loan.
Types of Loans
Following are the 5 types of personal loans. Choose what types of loans are suitable for your need to borrow and repayment capacity.
- Unsecured Loans: These are the most well-known type of personal loans. These loans are unsecured as you don’t need to put any collateral against the loan amount. The interest rates of unsecured personal loans are generally higher to cover the risk. Lenders avoid giving a significant amount as an unsecured loan for a long time unless your credit profile is good. A strong credit profile can also benefit you in terms of interest rates and get you a £15000 loan easily.
- Secured Loans: Unlike unsecured personal loans, these loans require you to put some sort of collateral like a property or vehicle. It means you can lose your asset in a scenario of non-payment. However, secured loans are ideal for you if you are confident about loan repayment. The collaterals lower the risk for lenders so you can negotiate a better interest rate. The loan amount can also increase because of the presence of collateral.
- Guarantor Loans: These loans are also known as Co-signed loans. Someone gives a written guarantee to the lender that he/she will repay your loan amount if you don’t pay. Generally, an older relative or a close friend gives such assurance in writing. This is because the non-payment of a guarantor loan is risky for both guarantor and borrower. The guarantor must meet the lender’s criteria to sign the loan document. Getting a guarantor can significantly improve your loan approval chances if you have a low credit score.
- Debt Consolidation Loans: This is a unique type of personal loan which consolidates all your other debts into one. It makes your debts more manageable. But it would be best to be careful when working out the calculation. This is a longer duration loan, so you may end up paying more than what you will pay in all your other loans combined. You mainly need to check two factors. Firstly, your debt consolidation loan should make your repayment simpler while not increasing the amount of overall repayment. Secondly, you must be comfortable with the new and generally extended loan repayment duration. There are several common myths about debt consolidation that might have you thinking twice about selecting this option for resolving your financial issues.
- Fixed-Rate Personal Loans: One of the reasons unsecured personal loans are preferred against credit cards is that they charge fixed interest rates and fixed EMI. Consistent payment each month makes it simpler to plan the budget for the borrower. Fixed-rate personal loans are the most common type of unsecured and secured personal loans. If you take an unsecured personal loan, the interest you pay is already on the higher side. By taking fixed-rate personal loans, you ensure that a further rise in the interest benchmark by the bank doesn’t increase your loan’s interest. Fixed rates are all the more critical if your loan is long-term.
You can match your need for loan and repayment capacity with different types of personal loans to decide which one is best suited for you. Whatever type of loan you opt for, you must always compare loans offered by different lenders.
Check the interest rate, processing fee, repayment tenure, and hidden costs. Zero down on an unsecured personal loan only after analysing all these factors.