There are a lot of different types of loans out there and even though you have opted to take out a personal loan, there are still a few things to know about. Every personal loan is a little different too! Having full comprehension will help you get the loan that is best for you and improve your financial future. Take a look at these key loan features to help you decide which loan is best for you.
Unsecured vs Secured Loans
You may have seen different personal loans advertised as secured loans or unsecured loans. A secured loan is one that is backed by collateral such as a home or car. This means you can take out a loan, offering your asset as collateral if the loan goes unpaid. These loans often have lower interest rates and may be easier to get if you have poor credit. However, secured loans are riskier to you since the lender can seize your asset if you fail to pay the loan.
An unsecured loan is one that is not backed by collateral and is given to you based solely on your financial history and credit score. An unsecured loan may have slightly higher interest but, if you have good credit, you can still lock in a decent rate. You also cannot lose your assets if you fail to pay the loan.
Fixed Rate Loan vs Variable Interest Loan
Most personal loans are fixed rate loans. This means that the interest payment and the loan payment will remain the same. This makes budgeting for the loan payment easy as you know exactly what you will owe each month.
A variable interest means that the interest rate will change over the life of the loan. Very often, these kinds of loans are offered as a line of credit, so you can borrow as much as you need up to a certain amount. As you pay down the loan, the interest you pay will also decrease as it is a reflection of the premium. You will also only be paying interest on the amount you use rather than the total amount you borrow. The fluctuating rates will make it hard to budget for as every month will be different.
Debt Consolidation Loan
You may want to take out a personal loan to consolidate debt. If you have multiple accounts open and in debt, rolling them into one, easy to manage payment may be beneficial. It may also be easier to qualify for a debt consolidation loan rather that a credit card balance transfer. If you have a good credit score, this is a great loan to consider in order to organize and manage your debt.
Credit History
Lenders look at a variety of things when assessing your ability to qualify for a loan. One of the first factors is your credit score. This is a number assigned to you based on your credit history. Your credit score goes up when you pay your bills on time, have low debt and have shown years of financial responsibility. Your score will go down if you miss credit card payments, have accounts in collections or have little to no credit history. Working on improving your credit score is a perfect way to increase your chances of being approved for a loan.
There is a lot to know about personal loans and the more you know, the better you will become at choosing the perfect loan for you. Be sure you fully understand the loan terms you agree to and how your loan works. Do this, and you will certainly benefit from personal loans!