6 types of personal loans you should know about in 2020
From weddings to once-in-a-lifetime vacations to emergency home repairs — you’ll probably need a personal loan someday. When deciding which type of personal loan you should get you should assess your financial situation first to see what may be the best fit.
Typically lending institutions will look at your credit history, income, and assets to see if you’re a good candidate for a loan. If you’re not, you might be requested to put up collateral or even have a cosigner.
Today, despite low-interest rates (US average is 5.28%), in the wake of the Coronavirus pandemic, banks are leery to give loans. Fortunately, there are other options available if you want the best rates on personal loans.
6 conventional personal loan types
If you go to your local bank with a terrific credit and FICO score, you’ll probably qualify for an unsecured loan. In this case, the bank will usually offer you a personal loan between $1,000 and $60,000 — or sometimes, as much as $100,000.
Loans are repaid on average between 1 to 6 years, and APR will range between 5% and 36% at the highest. Now, you might be wondering what type of personal loan has the highest APR?
Since the financial institution is taking a risk by not obtaining collateral, your APR will be based largely on how high your credit rating is and what assets you hold. Bank loans with a high APR indicate a borrower’s low credit score or risk of defaulting on the loan.
If your credit score isn’t great, but you have something valuable to put up as collateral, then a secured loan might be a better option. The bank (or lending institution) assesses the value of your assets and will give a loan based on their value.
They can give you a lower rate because if you default on the loan, the bank or lending institution will seize your collateral and sell it to recoup any losses.
This is when someone else joins you in signing the loan (usually a family member or a friend). Essentially acting as backup in case you default. This could be great if you have bad credit, or no credit at all, as the bank (or lending institution) will have more faith that you’ll pay back the loan.
Home equity loans
Sometimes referred to as a second mortgage, a home equity loan is when the home serves as collateral for the bank, and the amount you’re allowed to borrow is based on a combined LTV ratio of 80% to 90% of the home’s appraised value.
A typical home equity loan has set terms of repayment. You must make consistent, fixed payments covering both principal and interest. As with any mortgage, if the loan is not repaid, the home could be sold to recoup the outstanding debt.
If you want to improve your home, then taking out a second mortgage might be a good option. Especially if you’re going to improve the home’s value.
It’s important to keep in mind that you’re putting your home on the line — if real estate values fall, then you could end up owing more than your home is worth.
Debt consolidation loans
One day you might find yourself with multiple forms of debt. You credit card bills are piling up, you owe your family money, perhaps you have outstanding medical bills.
If these debts are overwhelming and are accruing varying levels of interest, then a debt consolidation is the best type of personal loan to get.
In debt consolidation, you take out one giant loan to cover the costs of smaller loans and then focus on paying back one loan instead of many.
Debts consolidation loans can greatly reduce your monthly costs into one affordable payment. Especially when it comes to credit cards which typically have high-interest rates (the current average is 16% — yikes!). Depending on your situation, this type of loan can be secured or unsecured.
Remember though, if you take a debt consolidation loan, you must be disciplined, and not be tempted to run up more balances on your credit cards or other forms of personal loans.
Putting a loan on a credit card is a viable option if you’re certain that you can pay off the balance in a short period.
Credit cards have notoriously high-interest rates which often land people in deeper debt. With the average credit card interest rate at 16%, it’s important to shop around before you apply for a card and carefully read the terms.
Want better options? Peer-to-peer lending may be the answer
For a long time, bank loans and credit cards were the only options available if you needed money. Today, however, many types of personal loan lending platforms are replacing brick-and-mortar financial institutions. The largest innovations have come from P2P lending platforms.
How P2P loans work
With peer-to-peer lending (P2P) you’re not borrowing from a bank but an individual or group of individuals who are prepared to loan you money. P2P lending usually offers better interest rates and better liquidity than a traditional bank.
Unsecured and secured P2P loans
Some P2P lending sites operate similarly to banks in that they will assess your creditworthiness and issue an unsecured loan. This, however, puts investors at risk. If you default they will be left with nothing.
Other platforms issue secured loans. Again this is a terrific option if your credit score isn’t high, or if you’ve been rejected from a bank for any reason. MyConstant is one example of a lending site that issues collateral-backed loans. They require all borrowers to put up highly liquid cryptocurrency as collateral for loans.
What is liquid collateral?
While assets like houses and cars do have value they aren’t very liquid. If you default on a loan, it might take a long time for the bank to sell your car and collect the money. At that point, your car might be worth far less than it was before, and thus, the bank takes a hit.
An increasing amount of secured loans in the P2P lending world take a different approach. Platforms like MyConstant reduce the chance of default by taking highly liquid collateral like crypto from borrowers. If you happen to default on the loan, the platform can sell fast and recoup investor losses.
Get a personal loan against your crypto with MyConstant for rates as low as 6% and no higher than 7%
Choosing a personal loan type that’s “the best” depends on your financial situation. However, it’s safe to say that crypto-backed P2P is leading the way for personalized loans.
MyConstant gives you better APR’s (as low as 6%), and leniency with credit scores. They can help you if you are otherwise hampered by strict bank regulations. We made a list of some of the top P2P lending platforms for borrowers you should check out for more information.
When borrowing with MyConstant you get:
- 0 probing credit checks
- Support for over 70 different cryptocurrencies
- Can withdraw loans in USD or stablecoins
- Payment in crypto or USD
- Rates starting at 6%
- No limits to loan amounts
Give us a try today. Sign-ups are free.
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