In order to stop living paycheck to paycheck, establishing an emergency fund is vital. Having adequate savings is really the only thing that will keep someone out of debt for the long term. However, there may be times when an emergency happens before we are prepared. Multiple problems often happen at the same time. Loans can offer a solution to financial problems that happen all at once. Before borrowing, it’s important to understand the different types of personal loans to make the best choice for your situation.
Unsecured Personal Loans
Unsecured personal loans are just like they sound. You don’t have to put forth any collateral. The loan is not secured by something you own or by a co-signer. The good thing about this type of loan is that it’s quick and can provide cash almost right away. The bad thing is that the interest rates are higher than on loans secured with collateral, and generally, the repayment terms are short. If this type loan isn’t paid off within the agreed time period, huge interest charges will accrue. While the loan company can’t take any possessions from you for non-payment, they can ruin your credit. Don’t take an unsecured personal loan unless you know you’ll be able to pay it off on schedule.
Secured Personal Loans
Secured personal loans are backed by property the borrower owns like a house, car, or boat. Secured loans often have longer repayment terms and lower interest rates, which can save money if you need longer to pay off the loan. The down side is that if the loan isn’t paid, you will lose the asset used as collateral.
Peer to Peer Loans
Peer to peer lending cuts out the bank and allow the borrower to get money directly from investors. While this type of lending is not a new concept, the the arrival of websites like Lending Tree and Prosper have made it more main stream in recent years. Often interest rates are better with peer to peer lending than from banks or other lenders, but you must have a decent credit score, generally above 640 to get the best rates.
What Things Do I Need To Apply For a Personal Loan?
To apply for a personal loan of any type, you first need to have a purpose for the loan. While some lenders will give money without asking why, it’s important to have a necessary reason for borrowing money. Borrowing to pay a medical bill is a need. Borrowing to go on vacation is a want and not something to go into debt over.
After you have established that you need a loan, make sure your credit report is error free and that you’ve done all you can to raise your credit score. Free credit reports are available at annualcreditreport.com. It’s also important to have all sources of income like W2’s, tax returns, or pay check stubs available for proof of income if necessary. Since there are a variety of lenders, it’s important to compare rates to get the best deal.
While having a healthy emergency fund is the best way to deal with the problems that life throws at all of us, sometimes it isn’t possible to cover every situation. Understanding different types of personal loans could be a way to bridge the gap with short term borrowing.
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