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Personal Loans

Personal Loan Guide Step 1: Knowing the Different Types of Personal Loans

    Personal loans are a versatile financial tool that can help pay for many expenses, including medical bills, a summer vacation or making ends meet during tough times. Because personal loans are so versatile, many different types of loans can be classfied as personal loans. Having many different types of personal loans to choose from can be both a blessing and a curse. The many different options allow you to shop around to find the best rate, but finding the best rate can be confusing when you have so many different loans to compare.
    The only way to make shopping for personal loans easy is to know how each type of personal loan works. That way you can narrow your options before you even start to look at loan terms and interest rates.

Types of Personal Loans

    There are four main types of personal loans: a cash-out mortgage refinancing, home equity loans, home equity lines of credit and signature loans. Each type will give you the cash you need, but the eligibility requirements and cost of each is different. So, review the types of personal loans carefully. At least one will work for you.

Mortgage Refinancing: If you already have a mortgage on your house and your house has gone up in value, you can turn that extra equity into cash by refinancing your mortgage (National Association of Realtors). For example, imagine you had a first mortgage of $80,000 on a $100,000 house and your house goes up in value to $110,000. You could then take out a new mortgage for $90,000, pay off your old $80,000 mortgage and keep the $10,000 that is left over. That example is overly simplified because there are costs associated with refinancing your mortgage - appraisal fees, closing costs and others - but you still can get cash from refinancing your mortgage (Lister). One advantage that may offset the extra costs is that the interest rates of first mortgages are usually lower than that of other financial options, such as second mortgages, lines of credit and home equity loans (Lister).

Home Equity Loans: As you pay off your mortgage you build equity in your home. Lenders are often willing to give you personal loans using that equity as collateral. You can find lenders who are willing to lend you 125 percent of the value of your home's equity; however, most experts advise you never to go above the original value of your house (Michael). The greatest danger whenever you use your home as collateral is loosing it if you can't make your personal loan payments. Whenever your home is on the line, use caution. Another downside of home equity personal loans is that they usually have higher interest rates than a refinanced mortgage (Lister).

Home Equity Credit Line: Home equity lines of credit are very similar to home equity personal loans. The main difference is the credit line's flexibility. Once approved, you can withdraw extra funds to cover expenses as needed. You can often choose whether to pay interest only or in monthly installments, which adds even more flexibility to that type of personal loan (Hamilton). One downside of credit lines is that they have variable interest rates, which means you have to pay more if interest rates rise (Hamilton).

Signature Loans: Unlike the other three types of personal loans, signature loans do not require collateral, which means you don't have to put your house or another asset on the line (Gitman). Not having the stress of risking your house can be a big benefit. However, because they do not require collateral they are harder to qualify for and often have higher interest rates than other types of personal loans (McEachern). Signature personal loans are usually only made for $10,000 or less and mature in about five years (Lister).

    When choosing which type of personal loan will work best for your situation, weigh your options very carefully. If you are considering personal loans that use your house as collateral, be especially wary. Be sure you know what you can afford, and don't overstretch your budget. For all types of personal loans be sure you know what expenses you will have to pay and when you will have to pay them. Never sign any forms until you are completely sure that you understand what you are promising. If you shop around and do the necessary research, you'll find a personal loan that is right for you.

The Rest of Our Personal Loan Guide:


Gitman, Lawrence J. and Michael D Joehnk. Personal Financial Planning. (Ohio: Thomson South-Western, 2004), 277.

Hamilton, Gene and Katie Hamilton. Fix It and Flip It. (New York: McGraw-Hill Professional, 2004), 45.

Lister, Kate and Tom Harnish. Finding Money: The Small Business Guide to Financing. (New Jersey: John Wiley and Sons, Inc., 1995), 13-17.

McEachern, William A. Economics With Infotrac: A Contemporary Introduction. (Ohio: Thomson South-Western, 2006), 289.

Michael, Jeff. Repair Your Credit and Knock Out Your Debt. (New York: McGraw-Hill Professional, 2004), 49-51.

National Association of Realtors. "Refinancing Guide: Find out When and How to Act." (accessed July 30, 2006).