American households have a collective debt that totals over 13 trillion dollars. While that number might seem staggering and negative, it’s important to understand that not all debt is bad debt.
For example, somebody that takes out a mortgage they can comfortably afford to buy a nice house is in debt. A person that takes out a personal loan to start a business that makes them money would also technically be in debt, albeit, debt that benefits them financially.
Therein lies the importance of understanding the types of personal loans that exist and leveraging those loans responsibly.
In this post, we provide some education on loan types so you can better understand which loan might best serve your goals!
1. Credit Lines
Having a line of credit is one of the simplest types of personal loans you can partake in. With credit, you typically have a card that’s issued by a bank. Every time you swipe that card, your bank pays for goods on your behalf with the thought that you’ll pay them back, at least in part, at the end of the month.
When you pay off lines of credit at the end of the month, you won’t pay interest on your purchases (in most cases). If you pay your balance in-part though, you’ll need to pay extra until your debt has been absolved.
2. Loans That are Co-signed
For those of you that are having trouble qualifying for a loan, a cosigned loan is a type of personal loan option that might be beneficial. Co-signed loans are like any other personal loan with the exception that they have an additional backer.
That backer is usually a friend or family member with good credit.
Your co-signer puts their name on your loan alongside yours stating that if you default, they will be liable for your debt. That backing makes it much easier to get loan requests approved.
3. Unsecured Loans
When you set out to borrow money, you may hear lenders say that their loans are unsecured. Unsecured loans are loans that don’t require you to hand over collateral.
Most loans you’d get from a bank are unsecured. The only form of security an unsecured loan might require would be you providing types of security documents to confirm your identity and financial status.
4. Secured Loans
Unlike unsecured loans, secured loans require collateral. That collateral can be anything from a car title to the deed of your house.
With secured loans, if you default on your loan obligations, lenders can collect their debt via claiming your collateral.
5. Payday Loans
Payday loans are popular, unique types of secured loans. Borrowers can get a payday loan by writing lenders a check for the amount they suspect their next paycheck be, plus fees.
Borrowers are then lent their suspected paycheck amount.
At the end of the month, lenders will cash the check the borrower wrote them to reimburse themselves.
Which Types of Personal Loans Are Right for You?
Now that you know the types of personal loans that exist in today’s market, which loan is right for you? We can say confidently that there’s no one-size-fits-all loan product.
You’ll have to dig a little deeper into each loan type to see what works for your unique situation.
If you’d like more information about finance or other lifestyle topics, read more of the content we have available on our blog.