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One of the key decisions in taking out a personal loan is deciding which type to form. You will get a lot of advice from people on the Internet, but as you analyze all the info, keep an eye out for the overall cost, interest rates, fees, and repayment issues.

However, when you need money desperately, you might be blind to some obvious things that can potentially result in worse loan terms, like higher APRs. So, today, we will break down the features of each of the major types to help you make the best decision when you shop around for a personal loan.

Types of Personal Loans

If you are planning to apply for a personal loan from an online provider, credit union, or bank, you will likely encounter the following types.

Unsecured Loan

An unsecured loan is a common type of lending for small-dollar loans that don’t require borrowers to put in a collateral pledge to get money. This way, there is no risk of losing any sort of valuables for borrowers, even if they fall behind on their repayments. Lending providers are the ones who take on more risk by lending to customers this way. For obvious reasons, they want to compensate for the risk by setting stricter rules to qualify for an unsecured loan.

loan application in business folder showing financial investment concept

Secured Loan

Unlike the previous source of financing, a secured loan is a loan that uses collateral, like a house or a car, to secure the debt. This way, a lending provider has a security interest in a borrower’s asset and may take collateral owned by the borrower if the latter defaults on the loan Filld. Since secured loans are less risky to providers, they usually come with lower interest rates and higher approval rates.

Fixed Rate

A fixed-rate loan is one where the interest rate locks at the beginning of the loan and stays the same for the entire life of the loan. With a fixed-rate condition, there will be no fluctuation in the monthly installments no matter what happens to the market down the road. This is very convenient for those who like to manage their finances and know exactly how much they will be paying. 

Adjustable Rate

An adjustable-rate loan is one where the interest rate can fluctuate during the entire term of the loan, depending on a variety of factors. Therefore, it’s more challenging to plan a budget for an adjustable-rate loan. Consumers who believe that the market will go down tend to choose variable types, as they will have lower APRs than their fixed counterparts. However, this is partly because there is a risk involved for borrowers.

Line of Credit

With a line of credit, borrowers are able to use money whenever they need and only make payments on what they have borrowed. This source of financing is flexible because it is possible to draw as much or as little money as needed, up to a certain credit limit, which the lending provider typically sets for each customer based on their credit report, income source, and other eligibility factors.

Paycheck Advance

A paycheck advance allows customers to withdraw funds from a credit card up to their credit limit, which again a lender sets based on their eligibility criteria. This source of financing is considered a short-term loan that generally has an interest rate that’s similar to or slightly higher than the credit card’s regular purchase. There is also an origination fee required to pay on top of the interest rate, which is around 3% and 5%.

How to Compare Personal Loans

Regardless of which type of personal loan you decide to choose, it is crucial to know your borrower rights. Your lending provider has to disclose all the information regarding the loan, such as the amount of money you are planning to borrow and APRs. Here are some essential things you need to pay attention to every time if you want to settle for the best possible loan term.

Choose Multiple Loans

First things first, give yourself at least a few days to do your research and compare a few different options available on the market. Many popular lending providers allow pre-qualification to make this comparison-shopping process easier.

If you are looking at the APRs of two different providers, for instance, make sure they are for the same repayment timeline. On top of that, check to see if either provider charges any origination fees, as these can cost you up to 5% of your loan amount.

Look at the Key Features

When you compare loans, one of the most important parts of the decision should be based on the interest rate, as it shows how much the loan will cost you overall. After that, look at fees and other additional costs. Some common charges include origination fees, late penalties on missed payments, early prepayment fees, and returned penalties.

Aside from charges, spend a minute to see if the provider offers any other benefits that would help you in your comparison-shopping. It can include but is not limited to flexible repayment terms, financial training, product discounts, and jobless protection, among others.

Apply for a Loan

Once you have decided on the personal loan you would like to take out and have agreed to its terms and conditions, submit your form either through the lending provider’s store or website. At this phase, the provider will do a hard credit check, which makes your score drop slightly and temporarily.

After you get approved and receive funds in your bank account, make sure you have a clear repayment plan in your head and know when the next payment is due. Try to repay accordingly to avoid penalties on missed payments and default on your loan.

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