Money Rehab with Nicole Lapin - How To Pick the Personal Loan That's Right For You

Episode Date: July 2, 2024

Personal loans can be a lifeline in times of need. However, not all personal loans are created equal. Today, Nicole unpacks six common types of personal loans, the benefits and risks, and helps you understand which one might be the best for you and your financial picture. Want to estimate how long it would take you to pay off your debt? Use this debt repayment calculator: https://www.creditkarma.com/calculators/credit-cards/debt-repayment All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA & SIPC. Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. Brokerage services for alternative assets are offered by Dalmore Group, LLC, member FINRA & SIPC. Brokerage services for treasury accounts offering 6-month T-Bills are offered by Jiko Securities, Inc., member FINRA & SIPC. Banking services are offered by Jiko Bank, a division of Mid-Central National Bank. Securities investments: Not FDIC Insured; No Bank Guarantee; May Lose Value.  Brokerage services for Regulation A securities are offered through Dalmore Group, LLC, member FINRA & SIPC. Risks at public.com/disclosures/alts-risk-and-conflict-of-interest-disclosure See public.com/#disclosures-main for more information.

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To get started, visit bofa.com slash newprosmedia. That's B-O-F-A dot com slash N-E-W pros, P-R-O-S, media. Bofa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Personal loans can be a lifeline in times of need. They give us financial support for a multitude of reasons, consolidating debt, covering unexpected expenses, starting a business, or paying off medical bills. However, not all personal loans are created equal. Last week, I broke down peer-to-peer lending, which is a way to take out a personal loan from a person and not a bank. That's not the only way to get a personal loan, of course. I wanted to also give you six other common types of personal

loans and break down their unique characteristics to help you understand which might be the best fit for your financial situation. Number one, unsecured personal loans. Unsecured personal loans are not backed by collateral. This means you don't have to put up any of your assets like a house or a car as security for the loan. The lender bases their decision on whether to give you money based on your credit worthiness, which includes your credit score, your income, and your debt-to-income ratio. Unsecured personal loans are best for people with a good to excellent credit score who need a lump sum for expenses like home improvements, medical bills, or debt consolidation. Interest rates on unsecured loans typically range from 6% to 36%. Obviously, that's a big range.

What interest rate you secure is going to depend mostly on your credit score and your financial history. For these types of loans, the terms are usually between two and seven years. So net net for unsecured personal loans, the benefits are no collateral required, fixed interest rates, and predictable monthly payments. Of course, there are risks too for unsecured personal loans. The risks are higher interest rates for those with lower credit scores and potential fees for late payments. Number two, signature loans. Signature loans are a type of unsecured loan that requires only your signature and the promise to repay. Like other unsecured loans, they don't require collateral. Signature loans are suitable for those with strong credit profiles who need quick access

to cash without the hassle of pledging collateral. Interest rates on signature loans generally fall in the same range as unsecured loans, so you'll see this range between 6% and 36%. But the terms tend to be shorter than unsecured loans, typically one to five years. The perks of signature loans are a fast approval process, no need for collateral, and they can be used for a wide range of purposes. The risks here are similar to unsecured personal loans. High interest rates for those with lower credit scores and potential penalties for missed payments. Number three, secured personal loans. Secured personal loans, in contrast to unsecured

personal loans, require collateral, like a car, a savings account, or other assets. The collateral reduces the lender's risk because if the borrower defaults, the lender is not going to lose everything because they have this asset that they can reclaim. This means that lenders typically offer lower interest rates for secured personal loans. Interest rates typically look like 3% to 25% depending on what kind of collateral it is and what kind of credit profile the borrower has. The payment terms for those can vary widely. It could be as short as a year and as long as seven. These loans are ideal for folks who might not have a strong credit profile, but have

valuable assets that they could use as collateral. While the low interest rates are a perk, the risks are major. You could lose your house, your car, whatever you put up as collateral if you default on that loan. Number four, debt consolidation loans. Debt consolidation loans are specifically designed to combine multiple kinds of debt into one single gigando monthly payment, often at a lower interest rate. These loans are best for people with multiple high interest rate debts who want to simplify their payments and potentially lower their overall interest rates. The interest rates, of course, will vary based on your credit worthiness, but you'll probably see it range from 6% to 20%, and then you'll be asked to pay back the loan from between two and five years. Typically, the draw for debt consolidation

loans is that you'll be able to basically smush a couple of different forms into one loan with better terms, either lower interest rates or a longer term. Another perk that really cannot be understated is the fact that debt consolidation loans makes payments feel simpler and more manageable. The risks when it comes to a debt consolidation loan is that if you have poor spending habits, you might accumulate new debt on top of the debt consolidation loan number five co-signed loans a co-signed loan involves a second person the co-signer who guarantees the loan if the primary borrower defaults the co-signer is then responsible for repayment co-signed loans are ideal for people with limited or poor credit history who need the backing of someone with stronger credit history to qualify for better conditions, terms, and rates.

The interest rates on cosigned loans are similar to unsecured loans, but often lower due to the added security of that cosigner, typically ranging between 5 and 35%, and you'll have between one and five years to pay it off. The great thing about cosigned loans is that you can get access to better interest rates and loan terms depending on your co-signer's financial picture, but the big risk is that if you default, you could seriously mess up your co-signer's credit. Number six, payday loans. This is by far my least favorite. Payday loans are short-term, high-interest rate loans designed to tide you over until your next paycheck. They are typically for small amounts and are meant to be paid within a few weeks.

Payday loans are generally aimed at people who need emergency cash but don't have a lot of access to other forms of credit because of poor credit scores or other financial challenges. The interest rates on these are crazy, crazy high. So far, the highest interest rate I've mentioned in this episode is 36%. For payday loans, the interest rates often exceed 400% APR. And as for terms, the shortest I've discussed so far is one year. Payday loans are typically due your next payday. So that's going to be two to four weeks from when you took out the loan. The benefits of payday loans are quick access to cash and minimal requirements for approval, but the risks far outweigh the benefits. The rates alone are cuckoo

bananas and predatory, and there's also a risk of falling into a debt cycle. And to make matters worse, there are significant penalties for late repayment. For today's tip, you can take straight to the bank. Your credit card isn't the only way to borrow money. If you need it, there are ways to take out personal loans, six of which I talked about today. But loans can quickly spiral into out-of-control debt if you aren't careful and don't have a bulletproof plan for repayment. I'd recommend using a debt repayment calculator like the one I've linked in the show notes so you can see how your interest could count against you if you don't think you'll be able to repay your loan swiftly. Money Rehab is a production of Money News Network.

I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Loy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.