Whatever your reason for wanting a personal loan, before you decide your best option, understand that a loan, regardless of the type, involves borrowing money and having to pay it back with interest. Each loan type serves a purpose, so it is important to understand how to obtain the best type of loan for your individual situation.
Securing a Personal Loan
If you have decided that a personal loan is right for you, there are steps one needs to take before you get cash in hand.
- Make sure your credit is good by obtaining a copy of your credit history. Review it carefully and fix any problems (such as outstanding debt or errors in the report) immediately.
- Check out your credit score (760 or higher gets you the best deal). You can get FICO scores and credit reports at www.myfico.com (consumer division of Fair Isaac Company).
- Shop around for a lender. Some suggest shopping local (like the corner credit union) before contacting the larger institutions.
- Compare lenders’ annual percentage rates, called APR. This is the annual rate of interest you pay for a loan.
Types of Personal Loans
- Normally used for business, convertible loans allow lenders the option to convert the outstanding principal of the loan into an equity position in the borrower’s company, which over time, may be worth more.
- Most personal loans are fixed-rate loans. The interest rate remains constant, so you pay the same amount every month until paid in full. Most homebuyers look for fixed-rate loans when they purchase a home. Though the interest rate is higher than with an adjustable-rate home loan, this type of home mortgage offers more security.
- These are what most people think of when they think of a loan. You borrow a set amount of money and then repay it along with interest at regular intervals over a set period. These loans typically finance homes, cars, and other expensive items.
- In general, payday loans (sometimes called cash advances) are one of the most expensive borrowing options, charging extremely high interest rates and excessive fees. They are a small, short-term loan secured against your next paycheck and are typically used for emergencies only. However, there are several payday loan alternative lenders out there like LoanNow, which offer better rates and experience for borrowers.
- A secured loan is such because you offer an asset, like a home or car, as collateral to guarantee repayment of the loan. If you fail to pay, the lender takes your asset. Home equity and standard car loans are examples of secured loans.
Single Payment/Bridge/Interim Loans
- The single payment loan has many names, including bridge loan and interim loan. Generally, a single payment loan is used for short term, temporary financing and is repaid with interest in one lump sum at the end of the term. Payday loans are examples of a single-payment loan.
- Unsecured or signature loans do not require collateral. With the right kind of credit history, your mere signature guarantees this type of loan. Unfortunately, they have a high interest rate due to the high level of risk. Credit cards are the best example of an unsecured loan.
*Variable-Rate/Adjustable Loans *
- Variable-rate loans are riskier for consumers than fixed-rate loans because the interest rate adjusts at different intervals throughout the life of the loan based on the market. However, the maximum interest rate a lender can charge is limited (capped). It is generally easier to get an adjustable loan, and the initial interest rate is typically lower. The most common variable-rate loan is the ARM (adjustable-rate mortgage) for homebuyers.