subject: Different Types Of Personal Loans [print this page] Like many other kinds of products, loans come in many varieties, each with their good points and bad. The key is to shop around and find the right financial product for your current needs.
To do this effectively you need to know two things.
First, what are your financial needs?
You may be saying that some extra money could help right now but have you really looked at your current financial situation.
Are there expenses that you could cut that would reduce or eliminate the need for a loan?
Are there things in the garage or the basement that you could sell to lessen the amount of money you need to borrow?
Are you able to pay back the money? If the loan payments will just turn around and bust your budget next month or the month after that, getting a loan is not going to do you any real good.
Once you have evaluated and adjusted your financial situation, and have arrived at a loan amount that will solve your problems and that you can pay back, it is time to consider loan options.
The most economical and safest type of loan is usually the secured loan. This is a loan where the current value of an asset, typically your home, is put up as collateral against the money loaned.
The upside is that secured loans typically offer the lowest interest rates and the most flexible payment plans.
The downside is that if you default, the property put up for collateral can be seized by the lender and sold to cover the debt. If the property does not cover the loan balance, you will still be liable for the rest.
In contrast, the unsecured loan is made with no collateral. It is based on the lenders assessment of your ability to pay back the loan or, in some cases, their ability to collect. If you have a good credit rating, which shows a track record of paying back debts, you can often get a better interest rate. Unsecured loans exist for people with poor credit ratings or who lack available asses to act as collateral in a secured loan. The interest rate reflects the additional risk assumed by the lender.
Lines of credit originated in the business world but are now available for the individual consumer. They can be considered as a kind of rolling loan where the lender determines that maximum amount of money you could borrow and makes that available to you on an as needed basis. As expenses come up, the holder of the credit line accesses these funds, often with a check, and the balance of the loan increases.
The credit card industry has introduced their version of the line of credit in the form of cash advances. Instead of making a purchase with your credit card, you can pull funds with from many ATMs and have the amount added to your credit card balance. Since this is a painless way to get at money, many people dig themselves into a financial hole by taking advantage of this too many times each month.
In some cases, you can have checks associated with your credit card that you can use to pay firms or individuals that dont handle credit cards. From the recipients point of view, it cashes just like a check drawn on your bank account. For the cardholder, when the check is cashed, instead of removing funds from your bank, you are adding to the balance of your credit card.
One controversial but often used option is the Pay Day loan. Targeting people with short term cash problems and inadequate credit, these companies will loan you money that will be paid back the next time the borrower gets paid. Since these are unsecured short term loans with little or no credit score requirements, the interest rates are naturally very high.
