If you plan to take out a personal loan, you will have several different methods in which to do this. Typically, lenders offer unsecured and secured personal loans. To help you decide which is the best one for you, here is a look at how each type of loan works and whom they are best for.
Unsecured Personal Loan
An unsecured personal loan is where a lender doesn't require collateral of any kind for the loan. Simply, you ask to borrow a specific amount, they approve you for that request and you make fixed monthly payments to repay it. Now it's important to note that unsecured personal loan rates might vary wildly depending on factors such as your credit score and income. Therefore, unsecured loans are a great option to consider if you have a strong credit score (680 and above) and want to receive a competitive interest rate. Meanwhile, if you have a lower credit score, there is another alternative that might be a better fit for you.
Secured Personal Loan
A secured personal loan is where you use collateral such as cash or a vehicle with a clean title to pledge in case you default on the terms. As an example, you apply for a secure loan of $500. The lender will require you to at least make that deposit before making the loan available to use. From there, you can borrow that money for any purpose and then make monthly payments on it. What's great about this option is you can receive approval even if you have a low credit score. In fact, secured loans are great because they give you the opportunity to rebuild your credit provided you make your monthly payments on time. However, when searching for this option, be mindful of the secured personal loan rates lenders charge, since some might try to take advantage of your situation for personal gain.
Things to Examine Before Taking Out a Loan
When you are ready to take out a loan, there are some steps you'll want to consider that can help you determine if you are ready for the loan and to help you find the right lender.
- First, it's a good idea to ballpark how much your monthly loan payment will be and incorporate that in your finances. Say your payment will be $150 monthly, for a month or two make an automatic payment from your checking to your savings account in that amount to see how it will affect your finances. If you discover this hinders you from paying other bills or saving money, then it's likely you'll want to hold off until you have more saved.
- When you are ready for the loan, you'll want to examine the lender's reputation. You can use helpful websites such as the Better Business Bureau to see if the lender has many customer service issues. If you notice this, then it is best to choose someone else.
- Lastly, you'll also want to investigate the terms the lender offers. Along with the interest rate, look for any fees they might try to slide into the loan. You'll also want to see if they will assess a prepayment penalty if you try to pay off the loan early.