Did you know that as of the third quarter of 2020, there were 42.7 million active personal loan accounts in the US? The average personal loan debt, in turn, amounted to $16,458.
Those figures prove how widely used personal loans are. After all, they allow consumers to borrow a lump sum and then spend the funds at their discretion. For example, they can use it to improve their homes, pay off existing loans, or cover emergencies.
Moreover, consumers can choose among different personal loan types based on their qualifications.
So, if you need extra cash yourself, it pays to learn more about the types of personal loans available. That way, you can better understand which ones are best for you and the requirements you need to qualify.
We’ll go over the most common types of personal loans you can get today in this guide, so be sure to read on.
Secured Personal Loans
Secured personal loans are loans backed by financial assets owned by borrowers. Those assets, referred to as collateral, must be properties of significant value. Cars, motorcycles, precious jewelry, fine art, and homes are examples of collateral.
Some lenders require collateral to cut their risk of losing money if a borrower fails to pay back the loan. In that case, they can sell the pledged property and use the funds to recoup their losses.
The upside is that some of the easiest personal loans to get are those backed by collateral. That’s again due to them posing a much lower risk of loss to lenders.
That’s also why borrowers with poor credit scores may find it easier to get a secured loan than an unsecured one. So, if you’re part of the 22.4% of US consumers with a subprime score (as of October 2020), a secured loan may be an ideal choice.
Another reason to consider a secured loan is to qualify for a bigger loan. After all, the total money you can borrow with such loans often depends on the value of the collateral. Therefore, the more valuable the asset is, the more you can borrow against it.
For example, let’s say you own a car outright and need extra cash as soon as possible. In that case, you might want to go for an auto title loan, in which you’ll use your vehicle as collateral. You can check out this location to learn more about how these loans work.
If you decide to take out a secured loan, though, make sure to make your loan payments on time and in full. Otherwise, the lender can take over the ownership of the asset you pledged.
Unsecured Personal Loans
Unlike secured personal loans, unsecured loans don’t require collateral. Instead, they depend on your promise (and your signature) to repay the loan.
That makes unsecured loans some of the best personal loans for you if you don’t have an asset to pledge.
However, that lack of collateral makes unsecured loans riskier to lenders. That’s why they have more requirements and can be harder to qualify for than secured loans.
For instance, most unsecured loan lenders require borrowers to have good credit scores. In most cases, lenders look for scores of 700 or above.
The good news is that the average FICO score (one of the most common credit scores in the US) has risen to 716 in April 2021. So, if yours is close to or higher than that, you might qualify for an unsecured personal loan.
However, even if you have a good credit score, you might still want to opt for a secured loan to snag a lower interest rate. Lenders charge lower rates for secured loans since they absorb less risk.
On the other hand, you can apply for an unsecured loan if you don’t own an asset you can use to secure new debt. The same goes for if you don’t want to risk losing ownership of valuable property.
Still, it’s imperative to pay back an unsecured loan even if it doesn’t come with the risk of property loss. That’s because unpaid personal loans have adverse effects on your credit standing. For example, they can lower your credit score, which, in turn, can affect your ability to get new credit in the future.
Personal Loans With a Co-signer
Co-signing is quite common; a 2019 survey found that over one in five people in the US co-signed a loan or rental. They did so to help out a relative or friend who may have otherwise failed to qualify on their own.
With that said, a personal loan with a co-signer is an unsecured loan where two people promise to pay back the debt. That includes the primary borrower and the co-signer. The latter is someone who agrees to repay the borrowed money if the former fails to do so.
In some cases, primary borrowers may need a co-signer if they haven’t built enough credit yet. The same goes for individuals who don’t meet loan requirements, such as having a good credit score.
So, having a co-signer can give lenders extra assurance that they will get their money back. After all, they can pursue two people for repayment. As a result, they may feel more inclined to grant primary borrowers new credit.
However, since co-signers may end up paying back the loan, they need to have the financial capability to do so, too. Thus, they need to prove that they earn a stable income every month. In addition, they need to have a good credit score and clean credit history.
Moreover, lenders often prefer co-signers to be someone close to the chief borrower. Parents and siblings are perfect examples of such individuals.
Always Stick To the Most Affordable Personal Loan Types
Keep in mind that as of 2020, the average American already owed $92,727 in consumer debt. That includes thousands of dollars in personal loan debts.
For that reason, it’s always best to stick to the lowest-cost personal loan types. That means going for the lowest-interest loan you can find. That way, you won’t end up paying so much money toward interest fees alone.
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