Personal loans 101: Types, pros, cons, and more
What's the story
Personal loans can be a great way to meet your financial needs, be it consolidating debt or financing a big purchase. However, understanding the different types of personal loans and their respective pros and cons is important before you make a decision. This article will take you through different types of personal loans, their advantages, disadvantages, and how to choose the right one for you.
Loan types
Secured vs unsecured loans
Secured loans require collateral, like property or savings, which reduces lender risk. Unsecured loans don't require collateral, making them riskier for lenders. Secured loans usually have lower interest rates due to reduced risk, while unsecured loans offer flexibility but may come with higher rates.
Interest rates
Fixed vs variable interest rates
Fixed interest rates remain constant throughout the loan term, ensuring predictable monthly payments. Variable interest rates can change based on market conditions, leading to fluctuating payments over time. Fixed rates provide stability, while variable rates may offer lower initial costs but come with uncertainty.
Loan duration
Short-term vs long-term loans
Short-term loans are generally repaid within a year or two and are ideal for quick financial needs. Long-term loans extend repayment over several years, making them suitable for larger expenses but resulting in higher total interest payments. Choosing between them depends on your repayment capacity and financial goals.
Specialized loans
Purpose-specific loans
Some personal loans are specifically designed for certain purposes, such as education or medical expenses. These purpose-specific loans may come with benefits like lower interest rates or deferred payments until after graduation or recovery from illness. However, they may also come with restrictions on how the funds can be used.
Credit considerations
Impact on credit score
Taking out a personal loan can impact your credit score positively by diversifying your credit mix and improving payment history, if managed well. However, missing payments or borrowing more than you can handle could negatively affect your score. It's important to assess how a new loan aligns with your overall credit strategy before borrowing.