Types of Personal Loans

Aug 21, 2017 by Smarter Loans Staff

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Choose From a Variety of Personal Loans Types

There are many types of personal loans available today which enable borrowers to choose from a wide variety of funding options. Choices include small loans from friends and family to larger loans to finance ventures such as education or starting a new business. Flexibility in lending, in addition to more financial products, makes it easy to find funds with payment terms to fit any budget.

Since there are so many options, it is possible to get lost in the maze of the numerous sources that offer personal loans. Here, information about personal loans are outlined under the following topics:

Personal loan defined
Uses and benefits of a personal loan
Personal loans for people with bad credit
Beware of personal loan scams
Repayment of a personal loan

Personal Loan Defined

A personal loan is defined as money lent for personal use and repaid by personal income. These factors make it different from a business or commercial loan. A personal loan is also known as a consumer loan. Unlike other credit, such as a home mortgage, or business equipment loans, the proceeds of a personal loan are used as the borrower sees fit, rather than for a specific purpose.

A personal loan can be secured or unsecured. A secured loan is guaranteed by some type of asset, usually what is purchased with the proceeds. For instance, if a borrower uses a personal loan to purchase a car, the automobile is used as collateral. An unsecured loan is approved without security of any type.

Some of the most common personal loans are:

A short term personal loan from a bank, credit union, or other financial institution
A home equity loan secured by the borrower’s equity in their home
Payday loans or advances (where available) against future earnings
Career specific personal loans (such as enlisted or military retirees, government workers, etc.)
Loans from friends and family

Both secured and unsecured loans can also be approved with the aid of a co-signer. A co-signer is someone who agrees to take on the debt if the borrower defaults. Personal loans are not revolving credit. They are approved for a certain amount which is repaid in monthly installments. Once the balance (and any interest) is paid, the contract for the personal loan ends.

Uses and Benefits of a Personal Loan

As stated, a personal loan can be used for a specific item like a car, furniture, or other personal items. Other creative uses for personal loans include:

To consolidate bills
Education expenses
Vacations
Extra cash for holidays or other special occasions
Home repairs
Weddings
A sudden emergency

The beauty of a personal loan is that borrowers have a choice of how (and when) to spend the proceeds of the loan. A personal loan allows more freedom than other forms of financing such as home equity loans, credit cards, and student loans. For example:

With a home equity loan, the application process is more complicated. In addition, defaulting on a home equity loan can put the borrower’s home at risk.
Credit cards, though not too difficult to obtain, limit the borrower to a limit, usually lower than a personal loan limit. Also, using the maximum limit on a credit card is not good for the borrower’s credit rating.
Student loans are borrowed exclusively for educational expenses which can include tuition, books, and housing.

Other personal loan benefits include the ease and convenience of having the same payment each month, along with the same rate of interest. The paperwork and application process for personal loans is more streamlined; approval is much faster than other loans. And on average, the interest rate for a personal loan is lower than a credit card.

Personal Loans for People with Bad Credit

With the exception of a loan from a friend or family member or a payday loan, a borrower’s credit rating will be used to determine whether a personal loan is approved, as well as determine the interest rate. Lending institutions will also ask for personal information, sources of income, assets and other debts when considering whether to approve the application. Depending on the lender, and the amount of the loan, a person with bad credit may not get approved at a traditional lending institution.

The good news is that there are other lending sources that cater to people with bad credit. Alternative lending sources can be found with online lenders and finance companies. Even some banks and credit unions have special programs that relax their credit standards to help people repair their credit. The drawback is that the borrower should expect higher interest and fees for their personal loan if they have bad credit.

The first step a borrower should do before applying for any type of loan is to check their credit score. Free credit scores are available from the three major reporting agencies once a year. Armed with their score, the borrower will have an idea whether they have credit issues that would mean they should seek alternative financing.

Beware of Personal Loan Scams

Unfortunately, there are entities that prey on people who are seeking personal loans, whether they have bad credit or not. In many ways, they take advantage of people who they believe are desperate to get money. Millions of people each year fall victim to personal loan scams.

Some signs of a personal loan scam are:

The so-called lender will ask for money up front before processing an application. A reputable company will disclose all fees that are included in the loan process, and they are payable after
Another red flag is when the borrower is asked to wire money and the “lender” does not supply a physical address.
If a company contacts a consumer and guarantees a loan, very likely it is scam since loans cannot be approved until credit scores and other information is verified.
Sometimes businesses will create a name very similar to a reputable company or bank to appear legitimate. Watch out for lenders that “sound like” established businesses.
Companies that contact consumers and ask for personal information like social security numbers, mother’s maiden name, date of birth, and so forth, are usually phishing for information to use to steal the consumer’s identity. Consumers should never provide this information unless they have applied for credit themselves, and then only after verifying the company is legitimate.

Repayment of a Personal Loan

The savvy and informed consumer will perform due diligence and, most likely, will discover that there is a personal loan that will fit their needs. After doing so, they may receive approval for a personal loan. What’s next?

Getting approved for a personal loan is actually the first step in getting and maintaining financial health. Once the loan is approved, there are several things that the consumer should do, which include:

Be sure to use the loan for the purpose intended. It may be tempting to squander the extra cash on something else, but that can lead to going into further debt later on.
Make each payment on time every month without exception. Use the personal loan as a means to improve or maintain a good credit rating.
Try to pay more than the minimum payment due. This is a good habit for all types of loans. It improves credit, lowers debt, and saves money on interest.
Avoid borrowing more money. Some lenders will offer another loan to borrowers who pay on time. Ideally, a personal loan should be paid in full before going into further debt.
Communicate with the lender. If emergency circumstances prevent making a payment on time, the lender should be notified immediately. Some lenders will allow borrowers to change the payment date to avoid late charges and fees.

The path to getting the most from a personal loan starts with charting a sound financial plan. This plan should includes defining specifically what the loan will be used for, with a realistic budget of how much the borrower can afford. It is also wise to do some research to find lenders who are reliable and offer the best interest rates. Upon approval, the responsible borrower will then be able to enjoy the proceeds of a personal loan, anxiety free, for the purpose intended.

Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.