When you are out of money or simply don’t have the budget to pay for a necessary home improvement, that’s when a personal loan helps best. Personal loans are quite useful, especially if you want to pay for something urgently without having to put your asset at risk.
Being an unsecured loan means that a personal loan doesn’t use your house or car as collateral against the loan. Lenders apply a fixed interest rate on a personal loan that is applied to the monthly payments.
If you’re interested in personal loans and want to learn about the best option, continue reading:
Types of Personal Loans
There are many different types of personal loans that you can opt for based on your needs. Before you borrow a personal loan, it is important to learn about the many types that exist. Let’s start:
· Secured Loans
Although personal loans are mainly unsecured loans, but there are secured ones as well. When you are borrowing a large sum of money, the lenders need a guarantee that they will get their money back. therefore, they use your house or car as collateral against your loan amount. This means that if you fail to repay the loan, your house or car will be at the risk of foreclosure. Secured loans are risky and when you default on them, they might make you lose your asset.
· Unsecured Loans
Most personal loans are unsecured, which means that they do not require collateral against the loan amount. When a personal loan is unsecured, the lender is taking a higher risk which results in higher interest rates. If you default on the payment, the lender will send over an extortion team to get their money back.
· Variable Rate Loans
Generally, the interest rate on an unsecured personal loan is fixed. However, depending upon the lender you choose, the interest rate may vary throughout the life of the loan. This type of a personal loan is known as a variable rate loan. In most cases, variable rate loans have an interest rate cap which is a limit set to define how much the interest can peak. Before applying for a variable rate personal loan, make sure you understand how much the interest rates will change throughout the course of the loan.
It is best to get in touch with your lender and learn all about interest rates and the interest rate cap. If the interest rate cap is too high, you might want to look for another deal or negotiate the existing one with the lender.
· Fixed Rate Loans
A fixed rate personal loan is the one with a fixed interest rate. This means that throughout the course of the loan, you will be paying a fixed interest rate. This loan is best for those who like to budget things out.
· Lines of Credit
Lines of credit are convenient personal loans that allow you to make use of the money you need and pay interest on it only. In this loan, you can use your desired amount of money from your credit line. Let’s say you have a personal line of credit worth £10,000 and you use £5,000, you will be paying interest for the amount used. When you are using a line of credit loan, you will come across both secured and unsecured loan options.
· Short-Term Loans
Short terms loans are the type of loans that are borrowed for a small period. Since these loans are urgent, they have high interest rates. Another name used for short term loans is payday loans. most short term loans are unsecured. However, based on the lender you choose, you might come across a secured short term loan that requires keeping your car or home as collateral. However, if you are not thrilled by the idea of putting your asset on the line for a loan, it is best you opt for an unsecured short term loan.
· Instalment Loans
There are a range of instalment loans including home equity loans, unsecured personal loans, and mortgages. What makes these loans different from all other personal loans is that you get to borrow a specific amount of money that needs to be paid in the form of instalments. These loans have fixed interest rates, which is the reason they are often the first choice for many people. Having a fixed interest rate means better budgeting and planning.
Benefits of Personal Loans
When it comes to personal loans, they have the lowest amount of risk. There are many more benefits to opting for personal loans including the following:
The best thing about a personal loan is that it comes with little or no risk. Since most types of personal loans are unsecured, they do not put your property or car as collateral, making you feel relaxed. In case you default on a personal loan, you know you won’t be losing your home to a foreclosure.
when you need money urgently, not many loans offer you the flexibility that a personal loan does. Whether you need money to make home improvements or to pay for a medical emergency, these loans are the best to choose.
Great for Emergencies
If you have a medical urgency or simply want money to pay off an existing debt, a personal loan is the best financing option out there. These loans are granted much easily and often have a high interest rate.
Personal loan terms can be negotiated based on the borrower’s choice. You can choose the loan repayment time by negotiating with the lender. Other types of loans do not offer these perks and the loan term is pre-set by the lender.
Personal loans are super convenient. No matter what your need may be, a personal loan is the best option. It helps you get money to meet an urgent need without having to put your home or car as collateral. These loans are also easier to get.
Factors Affecting a Personal Loan Approval
When you are taking a personal loan, it is important to ensure that you are taking care of the necessary things to increase your chances of loan approval. Just like any other loan, a personal loan is approved based on your financial standing and your ability to repay it in time.
If you want to increase your chances of getting approved for a personal loan, consider the factors given below:
· Credit Score
Without a good credit score, do not expect any loan to be approved by the lender. No one will give you money without being 100% certain that you can pay it back. therefore, it is essential to consider checking your credit report before applying for a personal loan.
It is easy to get a copy of your credit card from one of the three credit bureaus. Once your copy is mailed to you, you can assess it and find out possible errors and mistakes in the entries to get them corrected as soon as possible.
Errors and mistakes in entries are common in credit reports, which is why it is important to check yours at least one or twice a year. It takes a little time for the bureau to get rid of the mistakes and update your credit report.
In case your credit report shows that you are not a responsible credit card holder, your chances of getting approved for the loan will minimise. You can improve your credit score by paying bills on time and staying under your credit limit.
· Employment Status
Your employment status matters, especially if you are getting an unsecured personal loan. Most personal loans are unsecured, which means you are not keeping any collateral. When there’s no security against the loan, the lender needs an assurance that the borrower has the capacity to repay the money in time. That’s why personal loan lenders’ biggest concern is whether the borrower is employed or not.
If you are unemployed or looking for a job, you might not be approved for the loan. To make sure you get approved for the loan, you need to give the lender proof of your employment. Furthermore, if you switch jobs too much and do not stay in one place for long, your lender might hesitate approving you for the loan.
It is best to work at one place for at least a year to get a personal loan.
Is your income enough to repay the loan in time? That’s what every lender asks when someone comes for a personal loan. Since personal loans are unsecured, lenders only approve those who have a steady income for at least a year. If you have a high income (ideally more than the monthly loan payment), you will not have trouble getting approved for the loan. Lenders need to be sure that you can make regular monthly payments from your salary.
Unsecured or Secured, which is better?
One of the biggest struggles that most people face with personal loans is whether to choose a secured loan or an unsecured one. Well, both types of loans have their respective pros and cons. Om fact, the type of loan you choose mostly depends upon an individual’s personal situation.
If you want to decide and don’t know how, look below:
- It is easier to get approved for the loan since you have secured the loan with a collateral.
- Secured loans are ideal for those who have multiple assets to keep as collateral.
- You can borrow a large sum of money based on your asset’s total value.
- Secured personal loans are great for making big payments.
- You get low interest rates on secured loans.
- An unsecured personal loan is harder to get approved for.
- You will need a steady income to be approved for the loan.
- The interest on these loans is usually higher.
- You are not at the risk of losing your asset as unsecured loans are not secured by collateral.
- If you don’t have an asset to use as collateral, an unsecured loan is the best option for you.
In the end, it all comes down to the security of your asset. Putting your asset on the line for a loan is a risky choice to make. Whether you have many assets or not, it is advised to choose unsecured loans.
Personal Loans from Bank vs Personal Loans from Credit Unions
Personal loans are offered by both banks and credit unions. However, the question is, whether you choose a bank or a credit union to get the loan from?
Banks and credit unions are public institutions. Banks are for-profit businesses and credit unions are non-profit. There was a time when only banks offered accessible options to borrowers, but today, credit unions also offer an extensive range of options.
It’s no longer only banks that offer lower fees and great deal. Credit unions are also offering competitive deals for borrowers.
However, it all comes down to how much you earn, your financial status, and the interest you pay. If you fail to make the payments or do not follow the loan terms, neither will a bank loan help nor a credit union.
When taking out a personal loan, it is essential that you keep in mind all the terms and conditions that apply. Failing to make your monthly loan payment or exceeding your loan time limit is all going to end up badly for you. Even if you have an unsecured loan, you will undergo scrutiny and you will be brought to court by your lender. Furthermore, once you fail to pay back your loan, you get a defaulter tag in your credit report. This decreases your chances of borrowing money again in the future.