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Personal loans, private loans, and payday loans, why are there so many names for what seems like the same financial product? The easiest answer to that question is that each of these loans is a unique product meant to provide consumers with the funding they want depending on what their needs are.
With so many different loan products on the market, it can be a confusing, stressful, and sometimes impossible process to choose which one best suits your financial needs. Understanding the differences and the pros and cons of these loans and how each one functions is the best way to weigh your options and make the most informed decision.
To try to help you have the best understanding of what a personal loan is so that you can make the right decision for your financial situation, let’s take a look at what defines a personal loan.
A personal loan is what you might think of as a run of the mill loan, either from a bank or another traditional financial institution. It’s a loan that’s not specifically given to purchase something like a house or a car. Someone might apply for a personal loan to help pay off high-interest credit card debt or to cover an unexpected emergency.
Here are the main characteristics of a personal loan:
While you can choose whatever loan you want, a personal loan is a great option for those who have moderate to high credit scores and who are looking for a relativity large loan.
Under the personal loan umbrella, consumers can typically choose between secured and unsecured loans. The mains difference being that collateral or security, in the form of an asset, is required for a secured loan. The most common types of collateral are:
Generally speaking, if you are unable to qualify for a personal loan because of poor credit or past financial mistakes, applying for a secured loan can increase your chances of approval. The reason for this is because lenders view you as a high-risk borrower, offering collateral can lessen the risk of lending you money.
Now that you know what a personal loan is, let’s take a look at private loans.
Private loans can sometimes seem ambiguous which might even prevent you from applying for one. And while it’s true that private loans are very loosely defined, they are still an extremely valid and useful financial tool that anyone who is looking for a loan should consider.
Here are the main characteristics of a private loan:
If you’re concerned about your low credit score or past financial issues then a private loan maybe your best option. Private lenders are usually more willing to discuss your financial history and work out a deal with you, they rely less on credit scores and specific financial criteria.
One of the best ways to find a private lender is to receive a recommendation from some you trust. But, since this isn’t an option for most consumers, looking online is your next best option. There are countless online private lenders to choose from, just make sure you perform your own due diligence. When comparing lenders, make sure watch out for the following red flags:
Payday lenders prey upon those who are in desperate situations and in need of quick access to cash. They advertise themselves as a convenient and reliable source for same-day funding.
Here are the main characteristics of a payday loan:
Payday loans are almost always a bad idea as borrowers typically get stuck is what is referred to as the payday loan cycle. This is when a borrower needs to keep taking on more and more debt just to cover the cost of their payday loan(s).
Payday loan providers don’t check your credit as part of the application process, so if you have bad credit this isn’t an issue. They also likely won’t report your payments to the credit bureaus, unless you miss a payment or default on the loan altogether.
Personal loan providers, however, may ask to perform a credit check as part of their application process, although some may not. They will report your payments, both good and bad to the credit bureaus. This means, for consumers who are looking to improve their credit, a personal loan can be a great tool to use.
Personal loans and private loans are without a doubt your best options. They’re easy to apply for, easy to pay off and won’t ruin your finances. With that being said, here are some important questions you should consider when choosing a lender to work with:
Choosing between a personal loan, a payday loan, and a private loan should be based on personal preference and your current financial situation. Keep in mind that payday loans are typically the worst choice. Taking on debt that you cannot afford can cause serious financial issues down the road, always look for a lender who has a good reputation, offers a solution that fits into your budget, and who you is easy to work with.
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