Types of Personal Loans

There are a lot of different types of personal loan products out there these days. This month’s theme is centered on credit and unsecured debt, so I wanted to outline some of the more common personal loan products and share the pros and cons of each loan type.

Each of these types of loans are unsecured and, therefore, they do not have an underlying asset attached to them. Since there’s no underlying asset, this causes each product to carry a higher interest rate than their secured counterparts.

I have outlined these from the safest, lowest interest-bearing loans to the riskiest.

Personal Loan/Signature Loan. Fixed-term. Fixed amount. Fixed-rate. ~10%
Line of Credit. PLOC. Variable-term, renewal. Variable amount. Variable-rate. Lower cost than a credit card. Repayment based on utilization. ~11.5%
Credit Card Cash Advance. Typically higher than your credit card interest, and a fee may be applied for doing a cash advance. ~25%
Payday Loans. Responsible Lending created a map showing the real interest rate average for payday loans by state. The lowest average by state is Oregon, at an average of ~154%.

This last option really bothers me, as it is predatory lending at its finest. According to ResponsibleLending.org, Ohio has the highest average at 677%. However, lending laws in Ohio were said to be changing, preventing this high of assessed interest.

So if you have caught yourself in one of these products, you’re not alone. However, you could cut your interest rate by 75% or more by refinancing your car to pay off your signature loan.

Oftentimes people get stressed by their financial position, feel backed into a corner, and then make decisions that are not in line with logical thinking.

In many cases, the active use of these products can prevent you from building [Margin] in your finances. Although you can strategically use a LOC as overdraft protection or use one of the lower-cost options to pay off a higher cost option, these products typically carry much higher interest rates than the environment otherwise, so be careful when utilizing these products!