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Which Type of Personal Loan is Best? A discussion of Bad Credit Personal Loan Options from Bad Credit Signature Loans to Unsecured Personal Loans
All personal loans are not created equal. If you are looking for a personal loan & have bad credit or bankruptcy you have probably discovered the array of personal loans types and options. It can be confusing for the bad credit borrower, and even for those with more good credit! Here, we will discuss the different types of personal loan options, and how they work.
First, there are two main broad categories of personal loans: unsecured and secured personal loans. In general, secured personal loans have security requirements for the bad credit consumer, and are easier to qualify for than unsecured signature loans. They are also various personal loan lenders that will guarantee you a unsecured signature loans, which allows the borrower to obtain their loan quick, but the interest rates may be quite unfavorable - since most of these guaranteed personal loans are in essence a short term payday loan.
There are several different categories of Personal Loans. They include:
Fixed Rate Signature Loans: The rates for fixed-rate unsecured signature loans will determine how high your payments are and how much you save if you decide to consolidate all your bills into your new loan. With fixed-rate Personal Loans, interest rates and monthly payment amounts remain static over the life of the loan, whether it is 2, 3, or 5 years (some lenders even offer 10 year loans). At the end of the loan period, you have paid off both the interest, and the principal for the Personal Loan. Normally, the shorter the loan period, the lower the interest rate that you pay; each month you are paying both the interest, and a little of the loan principal (this is known as 'amortization' and allows you to pay off the loan when the loan term ends). Most people choose either a 2, 3, or 5-year Personal Loan term when getting a fixed-rate Personal Loan. Often, you can use a Personal Loan calculator to compare what your loan payments will be with different loan terms.
Be aware that the APR (annual percentage rate) can also vary with different lenders; be sure to calculate those in when using the Personal Loan calculator to compare lending institutions. Normally, fixed-rate Personal Loans are a good option if you plan to carry the loan for more than three years.
Adjustable Rate Personal Loans: Adjustable rate Personal Loans normally start off with low interest rates that can fluctuate during the term of the loan, based upon a loan index, such as treasury bill interest rates, the prime interest rate, or the Wall Street Prime Rate. Normally, the lender will add a margin to the index, which determines how much your monthly payments are.
The advantage of an AR is low initial payments; but the disadvantage is the fact that your Personal Loan rates can increase over time. If interest rates increase, your loan payments increase; although lenders will also put a cap on how often increases can occur (every 6 months, yearly, or every 2 years, for instance), and how much the Personal Loan can increase over the life of the loan (a lifetime cap). This makes AR's an especially good option for the bad credit personal loan borrower who only plans to carry their loan for a few years, then pays-off the balance before interest rates increase.
Some loans are a combination of fixed-rate and adjustable-rate Personal Loans. For instance, fixed-rate ARs lock in a fixed interest rate for a certain period, such as 3 or 5 years, before allowing interest rates to rise. This gives the bad credit borrower a lower initial interest rate and lower payments during the early years of the loan.
Two-Step Personal Loans: This is a variation of the combination Personal Loans that offers low payment and interest rates in the early years of the loan, then 'steps up' the interest and payments to a higher rate at a pre-determined time, usually 2 to 4 years after the initial Personal Loan is made.
Convertible ARs allow the borrower to convert the loan to a fixed-rate Personal Loan during the first couple of years of the loan, if interest rates are starting to rise. The conversion is done without a lot of finance fees, but the resulting fixed-rate Personal Loan will be at slightly higher than standard fixed Personal Loan rates at the time it is locked in.
Graduated Payment Personal Loans (GPs). These Personal Loans start with low payments initially, then gradually increase the payments at set times. In essence, you are paying less than the interest rate early on, then paying this interest later on as the payments increase. GPs are an option for the person who needs to qualify for a higher Personal Loan amount, and who plans to pay-off their loan within the first few years.
Buy down Personal Loans: With these programs, lenders will finance the loan for a percentage below the going standard rates (such as 2% below) the first year, then the second and third years, for an amount slightly less than the standard interest rate (such as 1% less); after that, for the life of the loan, the normal interest rate applies. This allows a bad credit borrowers to qualify for a larger loan, since the payments for the first few years are less, making it an option for the homebuyer who plans to pay-off their loan after a few years.
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