The personal loan industry is one of the biggest ones in the United States. Banks like Citi and Bank of America make billions of dollars every year from these loans. As a result, more companies have entered the industry. Goldman Sachs, a bank known for offering investment advice has recently moved into the sector. There are other start-up companies that have moved into the sector. The most prominent ones are Ally Bank and Lending Club. In this article, we will look at the main types of personal loans.
Secured Loan
Broadly, there are two main types of loans. These are secured and unsecured loans. A secured loan is a type of loan that has a security behind it. This security is known as a collateral. The role of the security is to safeguard the interests of the lender. It ensures that the borrower pays back the loan. If they don’t, the lender has the freedom of selling the asset to recoup their investments. These collaterals can be assets like a vehicle, a piece of land, or a house. A good example of a secured loan is a mortgage.
Unsecured Loan
As the name suggests, an unsecured loan is the opposite of a secured loan. It is a loan that has no collateral behind it. The lender extends credit to a borrower and hopes that they will pay it back. They used their judgement on the borrower’s income, cash flow, their past record of paying money, and their credit scores. Unsecured loans are offered by banks, credit unions, and online platforms like Tunaiku Android and Tunaiku iOS.
Fixed Interest Loan
Loans can also be categorized depending on interest rates. When this is done, loans can be said to be fixed or variable interest loans. This is based on the concept of interest rates. The central bank sets a base lending rate and then lenders can adjust these rates. A fixed rate is one that does not change even when interest rates rise or fall. The advantage is that it cushions the lender against volatility when there are changes in rates. A good example of this is the loans that are offered by peer to peer lending marketplaces.
Variable Interest Rate
A variable interest rate does the opposite of a fixed interest rate. The rate gives the lender the power to adjust the rates depending on the underlying interest rates. For consumers, the benefit can happen when the central bank lowers interest rates. If it does, then most lenders will follow suit and lower overall rates. However, the opposite is also true. The lender can increase interest rates when the overall rates rise. This can make it difficult for you to plan.
Co-Signed Loans
These are loans that have a co-signer. This co-signer is also known as a guarantor. A guarantor is a person who signs the loan on your behalf. If you default on the loan, the bank will be allowed to take an asset of the co-signer. It can also be called a secured loan.
Final Thoughts
As a borrower, it is very important for you to understand these types of loans. Doing so will help you make the right decision when you want to borrow. It will also help you know the type of loan that is available to you.