If you need to borrow some money to pay for a home repair, buy a new appliance, or consolidate high-interest credit card debt, a personal loan is a great choice. Qualifying is relatively easy, and there are few or no restrictions on what you can do with the money you borrow. But, did you realize there are several different types of personal loans to choose from?
If you are considering applying for a personal loan, the following is an overview of your options to help you decide which type of personal loan is best for your needs.
1. Personal Loan
The standard personal loan is the most common loan that banks and credit unions issue. They are highly flexible and can be used for many different purposes.
Personal loans are usually unsecured, which means that no collateral is required. Some lenders, however, do require collateral, which could be your vehicle, savings account, or something else. Unsecured personal loans usually have higher interest rates than those that are secured.
Lenders will assess your financial history when evaluating you for a personal loan. Things they will consider include:
- Credit score
- Current debts
- Credit history
- Employment history
If you are approved for a personal loan, the funds may be available in one business day. Some lenders may also process your loan and disburse the funds the same day you apply.
Personal loans are very easy to manage. Interest rates are fixed, and you will make equal monthly payments until the loan is repaid. The simplicity and predictability of these loans help with budgeting.
2. Debt Consolidation Loan
A debt consolidation loan can be a lifesaver when you have several high-interest debts that are difficult to manage. Credit cards, store cards, title loans, payday loans, pawnshop loans, and others often charge significant interest on the money you borrow.
If you are only able to make the minimum monthly payments on your credit cards, for example, you may have a difficult time paying down your debt. Because of the high interest, new charges will be added to the total each month, making it feel like you are on a hamster wheel that you can never get off of.
With a debt consolidation loan, you borrow the money you need to pay off your high-interest debts. The interest rate on your new loan will be much lower in comparison. You then make fixed monthly payments until your debt is eliminated.
The great thing about debt consolidation loans is that your financial history may not disqualify you from being approved. Because these loans are intended to help people recover from difficult financial situations, it may still be possible to qualify with an average or poor credit score.
3. First-Time Borrower Loan
Everyone starts off in life without any credit history. But it’s vitally important to start building credit as soon as possible. Having good credit isn’t just about obtaining loans, it may also be checked to:
- Obtain a job
- Obtain utilities
- Rent an apartment
- Obtain cell phone service
- Get a good deal on your car insurance
Having an established credit history and a good credit score isn’t optional in the world we now live in. Because credit checks are so common, not maintaining good credit can really hold you back in life.
A first-time borrower loan can help you establish a credit history so you can qualify for future loans and other things. The way these types of personal loans work is simple. You borrow a small sum of money and then repay it with fixed monthly payments over the following year. Your timely payments will be reported to the three credit reporting bureaus (Equifax, TransUnion, Experian) to establish a credit history and credit score.
4. Fresh Start Loan
Fresh start loans are also sometimes referred to as credit builder loans. They are similar to first-time borrower loans but are used to improve your existing credit instead of establishing a credit history. A fresh start loan may be necessary if your credit score is low and you would like to apply for a mortgage, car loan, or another type of loan.
A fresh start loan can help you improve your credit score as long as you make timely payments. If you take out one of these loans and miss one or more of your payment due dates, it could actually harm your credit score instead of helping it. As you repay the loan, your lender will report your payments to the three credit reporting bureaus.
When you take out a fresh start loan, the money you borrow is held in a special bank account. After you have repaid the loan, you can then obtain the money. These loans have fixed interest rates and are usually for terms of 12 months.
5. Personal Line of Credit
A personal line of credit is different from the other types of loans previously discussed. With a line of credit, you are given a credit limit that you can draw from as needed.
If you are working on restoring an old car, for example, you could draw the money you need to rebuild the engine. Later, you could draw some more money to paint it. You can repeat the process until the project is finished.
Personal lines of credit are similar to credit cards in how they work. To replenish your available credit, you pay back the money you borrowed. You can borrow and repay money as often as you like during the draw period (the time the line of credit is active).
Discover More About Various Types of Personal Loans
If you are thinking about applying for a personal loan, TEG Federal Credit Union offers all of the loans mentioned in this article. Applying is easy, and you can do it either online or in person. It also doesn’t cost anything to apply and there are no hidden fees.
If you’re on the fence about whether a personal loan is a good choice for your needs, the following article discusses several important reasons why these loans are so popular.