Personal loans are one of the most common types of loans offered by any bank to its customers. The advantages of such loans are that there is no security deposit required for the borrowed sum in many cases.
The loan is given by the bank on the basis of your credit score. But when it comes to the rates of interest, a personal loan has a much higher interest rate than an education loan or a home loan.
During the pandemic, especially, people have been taking more personal loans than ever. The average loan balance increased by $199 for every borrower. In case you wish to know a little more about these loans, we have a list of six types of personal loans you can apply for.
1. Secured personal loans
This is a common type of personal loan where you borrow money against something that you own. It can also be the thing you plan to borrow the money for. For example, you can offer your car as collateral in case you’re not able to repay the loan.
In secured loans, you can offer things like vehicles, cash, high-value assets like expensive jewellery, or property. You can usually fetch a much lesser rate of interest with a secured loan because you’re already offering something as collateral. So the bank or the lender will not see you as a risk.
2. Unsecured personal loans
As the name suggests, this is the reverse of secured personal loans. This means that you don’t have to offer anything as collateral.
You will still be able to obtain the money that you want but unsecured loans charge a higher rate of interest or fees as compared to secured ones. Additionally, the lender will be able to take legal action against you if you do not repay the money.
So you need to remember that not repaying the debt is definitely not an option here. But on the plus side, these loans are easier to obtain and have lower interest rates than credit cards.
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3. Overdrafts
These are a kind of credit that you can attach to the transaction account which you use regularly. It helps to cover unexpected expenses.
An overdraft increases the balance in your bank account temporarily and does not charge any rate of interest, although it does charge on the amount you use every month.
You can usually apply for a personal loan in this form when the bank balance is $0 and they can go up to a certain limit only. Before you start using an overdraft, check if there are any additional fees or not.
4. Line of credit loans
This is a loan that is quite similar to a credit card loan. This is a pre-agreed loan that gives you a specific amount to spend. The interest will be charged only on the amount that you use.
For example, if your line of credit loan is $1000 but you spend only $500, you’ll be charged interest on the $500 only. But the disadvantage with this loan is that the rate of interest charged is usually pretty high. However, it is also convenient, since you have access to these funds at any time,
5. Debt consolidation loans
This is a kind of personal loan that allows you to merge all your debts, such as credit card debts or vehicle loan debts, to pay off as a single debt with lower rates of interest. However, this method has its own flaws.
Firstly, you can end up stretching this debt into a long-term loan and end up paying very high-interest rates. This is especially true if you consolidate all your debts for a home loan. But this can be avoided by bundling these loans into a short-term goal.
6. Student loans
This is a special type of loan available for students to pay for their books or training classes. Many lenders and banks offer these loans to students (above 18 years) in need.
The loan can be deferred up to 5 years if needed. If students have trouble paying back their loans, they can always refinance. In that case, students should research and choose from a variety of student loan refinance companies. This also helps to fetch lower interest rates.
Over to you…
These are the six different kinds of personal loans you can apply. Depending on your specific needs, you can approach any bank or reputed lender and apply for a loan.
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