Not all loans are created equal. If you need to borrow money, you first need to decide which type of loan is right for you.
When you start comparing loans, you will find that your credit is often an important factor. It helps to determine your approval and loan conditions, including the interest rate.
To get you started, let’s take a look at eight types of loans and their benefits. We will also discuss what to watch for when making a decision.
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Unsecured personal loans
Guaranteed personal loans
Alternative Payday Loans
Home Equity Loans
Credit card cash advances
1. Unsecured personal loans
Personal loans are used for a variety of reasons, ranging from paying wedding expenses to consolidating debt. Personal loans can be unsecured loans, which means that you don’t put up a home or car as collateral in case you default on your loan.
Ideal for debt consolidation and large purchases
If you have a high interest credit card debt, a personal loan can help you pay off that debt sooner. To consolidate your debt with a personal loan, you need to apply for a loan for the amount you owe on your credit cards. Then, if you are approved for the full amount, you will use the loan funds to pay off your credit cards, instead of making monthly payments on your personal loan.
Depending on your credit, a personal loan can offer a lower interest rate than your credit card – and a lower interest rate could mean big savings.
A personal loan can also be a good choice if you want to finance a major purchase, such as a home improvement project, or if you have other large costs such as medical expenses or moving expenses.
Should you take out a loan to pay off your credit card debt?
Beware of credit requirements and interest rates
Since unsecured personal loans do not require collateral, lenders generally look to your credit reports and credit scores to determine if you are a good candidate for a loan. In general, people with higher credit scores will be eligible for better loan terms.
You may be eligible for an unsecured personal loan even if you have good or bad credit. But you may want to shop around to make sure the interest rate and monthly payment are affordable for your budget.
2. Guaranteed personal loans
To get a secured personal loan, you will need to offer some type of guarantee, such as a car or certificate of deposit, to “secure” your loan.
Ideal for lower interest rates
Secured personal loans often have lower interest rates than unsecured personal loans. This is because the lender may consider that a secured loan is less risky – there is an asset that supports your loan. If you don’t mind giving collateral and you’re sure you can repay your loan, a secured loan can help you save money on interest.
Beware of potential asset losses
When you use your collateral to take out a loan, you run the risk of losing the property you have offered as collateral. For example, if you default on your personal loan payments, your lender could seize your car or your savings.
3. Payday loans
Payday loans are short term, high cost loans that are usually due from your next salary. States regulate payday lenders differently, which means that the amount of your loan available, the loan fees, and the time you have to repay may vary depending on where you live. And some states completely prohibit payday loans.
To repay the loan, you will usually need to write a post-dated check or authorize the lender to automatically withdraw the amount you borrowed, plus interest or fees, from your bank account.
Ideal for emergency money when you have no other options
Payday loans are generally $ 500 or less. Getting a payday loan can be helpful if you’re in a hurry and don’t have savings or don’t have access to cheaper forms of credit.
Beware of high fees
Payday loans have high fees which can correspond to annual percentage rates, or APRs, of around 400% – much higher than personal loan APRs, which are on average