The global personal loans market is forecast to reach $719 billion by 2030. It’s no secret that millions of people rely on these loans to settle financial emergencies, pay utility bills, and even start businesses.
If you’ve never taken out a loan before, you might not know that there are different types of loans you can find in the lending market. Most of those loans are designed for specific purposes and/or target markets.
Generally, loans, whether they’re meant for personal or business use, can be categorized into four main groups. Read on to learn more.
Secured Loans
A secured loan is any kind of loan that has a collateral requirement. The collateral’s market value must not be lower than the value of the loan you’re seeking. In many cases, financial institutions will only lend you a certain percentage of the collateral’s value.
The interest rate charged on these loans is typically lower. This is because the lender has leverage. In the event a borrower defaults on their loan, the lender can repossess and sell the item.
Secured loans are super common. If you have a mortgage, for example, the loan is secured against your house. The same goes for car loans.
Unsecured Loans
Unsecured loans don’t require borrowers to post any collateral. Banking institutions and other lenders heavily rely on the strength of your credit and income history to make a lending decision. Because lenders face increased risk when making unsecured loans, they usually charge a higher interest rate compared to secured loans.
With the advancement of mobile and financial technology, unsecured loans are now more accessible. Many lenders are reviewing applications using software, which enables them to make lending decisions in minutes.
When applying for an unsecured loan, do your research, get multiple offers, and choose a lender with good rates. Lenders on the fastloandirect.com network, for example, charge rates that vary from as low as 5.99% to as high as 35.99%.
Fixed-Rate Loans
A secured or unsecured loan can be a fixed-rate loan. As the name implies, these loans have a fixed interest rate. It doesn’t change regardless of anything.
A fixed-rate loan is beneficial when you’re taking out a large or long-term loan, such as a mortgage. You’ll have a clear picture of what you’ll be paying every month for the entire duration of the month.
Variable-Rate Loans
With variable-rate loans, the interest rate can change from time to time. Although there are guidelines dictating how low or high the applicable rate can go, there’s no telling when your lender will pull a surprise.
These loans make sense when interest rates are very low across the market. However, if the Federal Reserve System raises the rates, your lender can follow suit. This kind of uncertainty makes it difficult to determine your repayments over the life of the loan.
Types of Loans: Have Your Pick
Whether you want a car loan, mortgage, travel loan, working capital loan, or any other loan, you’ll find that it falls into two of the groups fleshed out above. It will either be a secured or unsecured loan, and the interest rate will either be fixed or variable.
Now that you know the different types of loans, which one will you go for?
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