If you need to borrow money, you need to first understand the different types of loans according to the requirements and the circumstances. Once the type of loan is decided then you can compare the interest rates, loan amounts, and the terms and conditions. As the situation varies the loan eligibility and criteria also vary. Let’s understand the different types of loans and the advantages and who should opt for.
- Unsecured Personal Loans – As the name suggests, a personal loan is a money that you borrow just for any purpose be it debt consolidation, pay medical bills, want to go for a vacation, or buy a new appliance, etc. The interest you pay is expressed as APR (Annual Percentage Rate) which varies from bank to bank and on the credit score. Most of the personal loans are unsecured which means you can apply for loans without keeping the collateral with the lender. This type of loan might be best for someone who is looking to borrow a small amount of money and is sure of repaying it on time.
- Secured Personal Loans – To get a secured personal loan you have to keep the collateral like a fixed deposit, certificate of deposit etc to secure a loan. The added advantage to apply for this loan is that it comes with the lowest interest rate as the lender considers this to be less risky, backed by the collateral.
- Home Equity Loans – Home equity loans allow you to borrow money against your home’s value minus the amount of any outstanding mortgages on the property. The lender verifies the bank account statement, savings and income to check the creditworthiness. They are easier to qualify for and you pay less interest than other types of loans as you are keeping your home as collateral. It is best suited in the situation when you require a large amount of money but make sure your payments are in place because if you end up with default payments, the lender may ask you to leave the home.
- Credit Card Cash Advances – It is a short term loan taken against the credit card which allows you to get a cash loan. They should be used in extreme emergencies as the interest on the cash advances is higher also sometimes there is the ATM or the bank fees which are involved in it.
- Payday Loans – They are small, unsecured short term cash loans with high-interest rates. The loan allows enough funds to the borrowers to get through to their next payday. The short term nature of the loan and repayment risk makes it risky and costly for the borrower. However, it can be a savior to meet sudden expenses with an easy process, minimum documentation, and formalities. All the advantages nullify the interest rates when the emergency comes in.
- Small Business Loans – Business loans help you to grow your business, invest in business infrastructure, expansion of existing business or if you are planning to start a new business then you can opt for this. However, the entrepreneurs who are planning to start a new business need to present the business plan in order to secure a loan.
Choose the one that best suits your financial situations. Your credit score, credit worthiness,
personal circumstances will have a big impact on selecting the right loan.