When it comes to major decisions such as purchasing a home or a vehicle, things are very simple – at least when it comes to loans. A new home requires a mortgage and a new car involves an auto loan for which you might need a paystub from a paystub maker free tool as a proof of income.
But what if you need a sum of money for another reason?
What if you don’t want to turn to high-interest credit cards or accessing your home’s equity?
Well, that’s exactly when a personal loan enters the game. In simple term, this loan gives you the freedom of using the money obtained however you please; sometimes, this type of loan may even have lower interest rates, which makes it more beneficial than other financing alternatives.
However, there are multiple types of personal loans and you should be informed on each option to choose what’s best for your current needs.
Before we get into detail on that, though, let’s find out what exactly is a personal loan and how it works.
What is a personal loan?
Basically, a personal loan is the money you borrow from a financial institution. The money you borrow have to be paid back in a monthly installment established by the financial institution.
In this case, the interest rate is calculated according to your credit score and other eligibility requirements which depend on the institution you opt for. A borrower with great credit can receive the lowest interest rate on their personal loan.
So what makes a personal loan different?
Well, the most notable difference is that the money you get via a personal loan can be used however you please. The most common reasons why people get a personal loan are:
- Paying medical bills
- Handling business with tools like this check stub maker
- Consolidating a credit card debt
- Having a wedding/personal life event
- Renovating/fixing the home
The main institutions that can offer personal loans are credit unions, banks and online lenders. Most of the times, paying off a personal loan lasts between two to five years.
The main types of personal loans
There are three main types of personal loans and each has a few small differences. Let’s have a detailed look to understand the right option:
- Secured personal loan
For this type of loan, you’ll need to provide a collateral as a backup. In other terms, you have to put up a valuable asset you own so the lender will liquidate it for cash in case you can no longer return your loan. This asset can be your vehicle, a property or even your bank account balance; note that retirement funds such as IRA or 401(k) are generally rejected.
If you are certain you can pay the loan back, this might be your best option. Why? With secured loans, the lender usually offers a larger loan amount since they have the certainty that they’ll recover their money.
- Unsecured personal loan
This is the most popular choice. With an unsecured personal loan, you don’t need to offer any collateral. However, the lender will take a close look at your credit score, debts and current income before establishing the sum of money they can offer.
Financial history is also an important decision factor, but if you have a fairly stable financial situation, you can usually get a good offer in this case too.
- Personal line of credit
Much like a personal loan, choosing a line of credit allows you to spend the borrowed money as you wish. However, there’s a small catch: instead of getting your funds in a single lump sum, here you’re able to borrow against a line of credit. In this case, you will pay it off over a certain term with interest.
This option may be beneficial if you’ve had an unexpected expense and need to get back on track, or if your income isn’t reliable at the moment.
Is a personal loan right for you?
Many times, personal loans may seem like the easy way out of a difficult financial situation. While that’s not always the case, opting for a personal loan can definitely be a solution in some cases.
The best thing you can do is to contact a financial expert who will guide you through every option and find the right solution to your problem.