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Different Variants of Personal Loans!

types of personal loans

Personal loans are unsecured where no collateral is required and have fixed interest rates & EMIs. But there are other variants under personal loans that are secured and have variable interest rates. The best loan that you choose to manage your cash crunch or any exigency depends on your credit score, for how much time you need a loan, and repayment capability, which are significant factors assessed by every lender.

Types or Variants of Personal Loans

  1. Unsecured Loans – It is the most common type of personal loan where no collateral is required i.e. you don’t have to mortgage any asset, thus riskier for lenders due to which they charge little higher interest rates. Credit score plays a decisive role here as your application approval and interest rate is based on that only. Interest rate range from 9% to 25% and loan tenure range from 12 months to 60 months.
  2. Secured Loans – These types of loans are backed by collateral that makes it safe for the lender in case if you default on your EMI repayments. Examples are home loans, car loans, etc. that are secured by the house, car, etc.

Almost all banks, non-banking financial institutes, and online lenders offer instant loans against your savings or any asset. As they involve less risk, so offered rate of interest is much lower as compared to unsecured loans as the lender has something in their hand.

  • Variable Rate Loans – In variable-rate loans, interest rates are controlled by the benchmark set by banks in consultation with RBI. The actual rate of interest that you pay every month will depend on the benchmark fluctuations, which may rise or fall. One of the biggest advantages with variable-rate loans is the lower APRs, which is not available with a fixed-rate loan.

There is also a specific capping done beyond which interest rate will not increase over a specific period. It is good when you want a loan for a shorter period as interest rates don’t rise in the short-term.

  • Fixed-rate Loans – Almost all personal loans come with a fixed rate of interest, which means your monthly EMI and rate of interest will remain the same for the entire loan tenure. Fixed-rate loans are better when you want to have constant EMI every month and need a loan for a longer period. Going with a fixed-rate loan makes it easier for you to do monthly budgeting as your payments don’t get changed
  • Co-Applicant or Cosigner Loans – If a borrower has a bad or thin credit history, then he/she can add a co-applicant whose credit score is good and bank or NBFCs can rely on his/her creditworthiness. Co-applicant acts as insurance to the lender and promises to repay the loan if the main applicant fails to pay.

Adding a co-applicant with a strong CIBIL score enhances the chances of loan application approval along with lower interest rates and more favorable loan terms & conditions.

  • Debt-Consolidation Loans – In this type of personal loan, you accumulate multiple debts under one single new loan that has a lower rate of interest. Running multiple loans means multiple EMIs on different dates with different interest rates and when you sum up the interest rate, it turns out to be huge. Consolidating all your existing loans under one head, allow you to manage your monthly EMI in a better way with a low-interest rate.
  • Personal Line of Credit or Over Draft – In this type of loan, credit gets revolved, it is more or less similar to a credit card. Here you get access to a specific credit line that you utilize as and when needed rather than getting a lump sum of cash. You need to pay interest only on the utilized amount, not on the entire amount.

A personal line of credit or OD works great when you need to borrow money for indeterminate emergencies or expenses.

  • Credit Card Cash Advance – Credit card companies also offer cash advances under credit card. When you need the cash for the short-term or on an immediate basis without any application process, you can use your credit card to secure money from a bank or an ATM. Although it is one of the convenient but expensive ways as higher interest rates are involved and this also greatly affects your credit score.
  • Payday or Salary Loans – A payday or salary loan is also a type of unsecured loan, but it is repaid by the borrower on his/her next payday. It doesn’t involve EMIs over a specific period. Loan amounts depend upon your salary amount.

It is short-term and comes with high-interest rates that make them risky. If these loans are not managed properly or not repaid on time, it will take the borrower into a debt trap as they continue taking up an additional loan to repay the first and interest rates continue to mount up.

  1. Pawnshop Loan – This is a type of secured personal loan as the borrower takes it against an asset such as gold jewelry or any electronic, which they have to leave with the lender. If the borrower fails to repay the loan amount then the lender can sell the asset. Interest rates are very high in this type of loan and the threat of losing your asset will be there if you miss repayments.

No matter what kind of personal loan you opt for, it’s advisable that you do a proper monthly budget plan that will ensure no financial catastrophe.

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