The financial service market offers an extremely rich choice of different types of loans. And if you don’t take out loans regularly, the distinction between them may not seem obvious. However, for people who periodically borrow money, this difference is significant.
Therefore, they maneuver between various types of loans to get the most favorable conditions, taking into account the subtleties of each of them. Find out the pros and cons of popular types of loans you can take in an unforeseen situation to choose the most suitable one.
Basic Types of Loans Appropriate for an Emergency
Popular types of loans, such as mortgages, auto loans, and student loans, make up the lion’s share of the loan industry. Thanks to them, you can get a large amount of money at relatively low interest rates, but these are purpose loans.
You cannot spend them on anything else except buying a house or car or paying for education, respectively. However, if you have other needs, the main choice will be between the following three types of loans.
1. Payday Loans
This type of loan is the shortest one, so it is very easy to get, literally in a couple of hours or even faster. To do this, you can use the services of the Payday Depot platform, which will select for you various offers from lenders based on your needs.
You can compare their conditions and choose the financial service provider that suits your demands. These loans have many advantages:
- Simple application procedure;
- High speed of loan approval;
- No credit bureau checks;
- No collateral.
The disadvantages of payday loans include high interest rates and the possibility of a statement from the lender to the credit bureau in case of non-repayment.
2. Personal Loans
This type of loan involves a more complex verification procedure. You can no longer get a loan instantly as with payday loans, but the amount of money you receive will be larger. Therefore, if your unexpected expenses are in the range of $1,000 to $100,000, then it is better to apply for a personal loan.
Payday loans are microloans, and you are unlikely to be able to take more than $500-$1,000 from a lender, although some state laws allow a higher upper threshold.
The option of taking several payday loans to cover your expenses will not be rational, since you will pay very high interest rates for servicing several loans.
3. Credit Card
If you use a credit card, you can draw money from this source. This option assumes a simplified procedure because you do not have to submit an additional application to the bank for a loan if you already have a credit card. However, servicing such debt is expensive.
The average credit card interest rate in America in 2023 is 24.45%. This is significantly higher than the interest on Personal Loans, which can range from 4% to 36%.
4. Home Equity Loans or Home Equity Lines of Credit (HELOC)
For homeowners, the equity built up in your property can be a potential financial resource. Home Equity Loans and HELOCs allow you to tap into this. The major draw is the typically lower interest rates compared to unsecured loans, thanks to the security your home provides to the lender.
These loans are especially suitable for larger expenses like extensive home repairs or hefty medical bills. However, caution is crucial. If you default, the lender could potentially take your home.
For instance, Jane from Wisconsin used a HELOC to remodel her kitchen. The enhancement increased her home’s value, but she was diligent about her repayments, understanding the risks involved.
Unlike revolving credit, installment loans give you a lump sum that you repay in fixed monthly amounts. The interest rates vary. Hence, shopping around is essential. For example, Mark had an emergency car repair, and an installment loan came to his rescue.
He compared rates from various lenders and secured a deal that fit his budget. Remember, these loans are versatile and can cater to various needs, from unexpected expenses to planned purchases.
Tapping into your retirement savings might sound counter-intuitive, but it’s an option. Borrowing from your 401(k) often means no credit checks or lengthy approval processes. Plus, interest rates can be more favorable. But be wary: while this seems enticing, you’re essentially borrowing from your future self.
Withdrawing now could jeopardize your financial comfort during retirement. Consider this option carefully and understand the long-term implications.
7. Peer-to-Peer (P2P)
The digital age introduced a revolutionary way of borrowing: P2P loans. Here, platforms connect borrowers with individual lenders or investors. Sarah, for example, consolidated her debts through a P2P loan, securing an interest rate that was significantly lower than her credit cards, based on her creditworthiness.
These platforms are flexible, catering to various needs. However, ensure you understand the terms, as they differ from traditional lending institutions.
8. Secured Personal
When you have valuable assets like a savings account or a CD, secured personal loans can be an avenue to explore. By offering collateral, you may access lower interest rates. Josh used his savings account as collateral for a loan when faced with a hefty medical bill.
While he benefited from the reduced interest, he was also aware that his savings would be at risk if he defaulted.
9. Title Loan
Need cash quickly? Title loans can be an option. Here, you use your vehicle’s title as collateral. But proceed with caution. While they offer rapid access to funds, the interest rates are steep. Plus, the risk of losing your vehicle if you can’t repay is real.
For example, Lisa took out a title loan when faced with an emergency. While she managed to repay on time, she recognized the high interest as a trade-off for the speedy loan process.
Therefore, when choosing the type of loan, you need to consider the following factors: how quickly you need the money, what amount will solve your problems, and whether you don’t mind checking your credit history with a credit bureau.
By taking all these factors into account, you will make the right choice.