Ask almost anyone to define what a loan is and they’ll probably give you the same answer, “borrowed money.” And they’re right, at the most basic level anyway. But loans can differ in a wide variety of ways, like the maximum amount you can borrow, qualifications to apply, and length of time to repay the lender.
Search the internet and you’ll find dozens of personal loan variations, but for borrowers with no credit or imperfect credit, there are 3 basic types you should know. We’ll go through the pros and cons of each type so you know which are riskier and which will help you build a stronger financial future.
Pay Day Loan
According to the CFPB, this type of loan is mainly for much smaller amounts, to be paid in one lump sum on the next (you guessed it!) pay day. Typically, the borrower gives the lender a post-dated check with the established amount due. If you cannot repay them on time, the lender has the power to cash that check and take the money straight out of your account.
It’s important to note that a pay day loan lender usually doesn’t consider your ability to repay the loan. This could put you in trouble if you run into some unexpected costs, like a car repair or a medical bill, before pay day rolls around. They’re also notorious for having extremely high interest rates, making for an overall risky loan.
According to Investopia, this type of loan requires an asset to be used as collateral, like a car title or a mortgage. A title loan can be worth quite a bit of money, based on the asset’s value, and the length of repayment periods vary. While this may be tempting, it’s important to know these types of loans come with high costs.
Firstly, you put yourself at risk of losing that asset, and then some! Interest rates on a car title loan are usually well over 100%, which could mean an even bigger financial burden for you. Similar to a pay day loan, your credit situation won’t be taken into account. While this means that smaller amounts will be approved more quickly, it also puts more pressure on an already strapped-for-cash borrower.
The only type offered at World Finance, a personal installment loan lets you borrow a set amount of money and then pay it back in equal monthly installments over the life of the loan — usually ranging from 4 to 46 months — with accumulating interest. Concerned about your budget while paying it all back? No worries. Installment lenders like World Finance work with borrowers to figure out the best monthly amount, so there’s enough funds to cover bills and other essential payments.
This type of loan is usually for small-dollar amounts, ranging from $500 to $5,000, and can come with lower interest rates. If you’re looking to build credit and create long-term financial stability, a personal installment loan is a safer bet since lenders will report payment behavior to credit bureaus.
Before you apply, be sure to read the fine print so you’re aware of any interest rates, fees, or prepayment penalties that could be attached (according to the folks at Credit Karma).
While all three of these loan types are different, two of the three are much riskier. When it comes to building credit and long-term financial strength, personal installment loans get our vote. But like any major decision, doing your research is key. You’re already on the right track!
Now that you have a basic idea of the pros and cons of these basic loan types, you can approach your research with a clearer answer to which kind is best for you and your needs. And that sounds so much better than just “borrowed money.”
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