Different Personal Loans and What They Should be Used For

Taking out a loan is never an easy decision to make. Whenever you borrow money, you run the risk of not being able to pay it back in the future. There are many risks, but some of them can be mitigated. One of the things you can do to make sure that you don’t get into trouble is picking the right kind of personal loan. There are so many loans with so many different names. Sure, it might be confusing to learn about them all. But understanding what’s on offer is vital if you’re going to make the right decision.

Failing to choose the right type of loan for you could lead to you getting a nasty surprise. You don’t want to find out later that you could have had a better deal if you chose a different kind of loan. And it’s not the creditor’s responsibility to make sure that you get the right type of loan. In the end, the decision as all yours. So, now is the time to learn about all the key types of loan out there. Each of the types of loans listed below has its own terms and rules, and they should be used in different ways.

Secured Loans

Secured loans are suitable for people who have assets that they can borrow money against. They make borrowing easier because the lender has that security. But it also means that your assets, usually your home or car, can be seized if you can’t pay back the money you borrow. No one wants to have their home repossessed, so this is a big decision to make.

If you’re confident of being able to make the repayments until the end of the term, it can be a good option. Because of them being secured, the interest rates tend to be lower than with unsecured loans. And you won’t have to wait around for the bank or creditor to do in-depth credit checks on you. All they’ll really care about is seeing the home’s paperwork which proves it’s your property.

Unsecured Loans

An unsecured loan is a type of loan that is given to you by a creditor, based on your personal credit rating. They will look at this rating and then decide whether or not they’re prepared to lend to you. If they are, they will also use the rating to decide what interest rate will be set. If they don’t think that your rating is good enough to get a loan, then they will simply reject you.

The major upside of these loans, when compared to secured loans, is that they don’t require you to risk your home. There is nothing that the creditor can do to take your home away if you do fail to make the repayments. These loans also tend to be medium-sized. The term length of the loan can vary, but it’s not normally any longer than a decade.

Debt Consolidation Loans

When you’re in debt, you often get into more debt. And when you have multiple different debts to deal with, it can all become a little messy and complicated. This is definitely something that you should fight against if you want to achieve financial security. Everyone who is in debt wants to get out of it as soon as possible. But when you have repayment deadlines coming at you all the time, it can be difficult.

One thing you can do to lessen the burden a little is use a debt consolidation loan. This replaces your smaller debts with a large one. That might not sound like much. But dealing with one debt is usually a lot easier than dealing with many of them. And all your various creditors will be paid off, leaving you with only one creditor to deal and communicate with.

Payday Loans

Payday loans have very short terms and high interest rates in most cases. They are meant for people who need a small amount of money to tide them over until their next payday. When they are used for this purpose, they can be very useful for all kinds of people who are in need of cash. And it’s very quick to get the money into your account too.

You should not use a payday loan for other purposes though. They are only for people who need a small amount of money and are able to pay it back in a short amount of time. People who don’t use them for this purpose are more likely to be hit with late fees and the interest fees attached to them. But as long as they’re used carefully and properly, they are useful.

Bridge Loan

A bridge loan can be called many different things. They are also known as interim loans or single payment loans. That last name is the most self-explanatory of the lot. When you take out a bridge loan, you don’t have to make regular repayments. Instead, you just pay the money back in one lump sum (with interest added) at the end of the term.

The term of the loan can be long or short depending on what you agree with the creditor. It is vital to know when the term ends so that you can prepare for that repayment date though. These kinds of loans are usually used for one-off financial obligations. For example, people buying a car might use a bridge loan to meet the price of it. But they can be used for anything that requires a lump sum. They’re best for people who are going to be able to meet that final, one-off repayment.

Student Loan

Student loans are provided through a financial aid program related to the university system. Of course, you can only get a student loan if you are a student who is currently studying. But the actual student loan application happens in advance of the course being started. There are many rules and qualifying standards that need to be met by the student before the application is accepted.

Unlike other forms of financial aid for students, such as scholarships and grants, they are expected to be paid back. There are options for defaulting on these loans, but that only happens after a very long time. And the actual loan repayments are spread out very thinly over years and decades. This makes the financial obligation easier on the student.

Anum

Anum Yoon is the founder and editor of Current on Currency. She loves all things personal finance, which is why you'll find her work all over the PF blogosphere.