There are two fundamental types of personal loans. Loans are further categorized based on how a borrower intends to use the money. Finance charges are applied to each loan based on loan type, loan purpose, lender policies, government regulations and your credit.
Money provided from personal loans can be used for many reasons. Applying for a personal loan is done in-person at a bank or credit union. Applications can be submitted online through a variety of lending institutions.
Before submitting a personal loan application, it is crucial to have a full understanding of personal loan rates, terms and repayment obligations. It is equally significant to know your credit rating and how applying through multiple loan services can reduce your credit rating and qualification status. Obtaining a personal loan is an important step to improving your life in many ways.
Secured vs. Unsecured Personal Loans
Personal loans are either unsecured or secured.
Secured loans rely on collateral to guarantee your ability to repay a lender in full, even in the event of default, death or other emergency. Collateral is defined as any item or items equal in value to the loan amount and held as security against the balance of the loan.
Items used as collateral can include jewelry, cars, houses, money market accounts, investments and more.
The lender ultimately decides what collateral is viable for use in your personal loan, but frequently chooses something related to the purpose of the loan. A typical example of collateral involves a car loan.
A lender finances your vehicle for you, but holds the title until the loan is paid in full. In the event of default, the bank repossessed the car as a means of recouping its losses.
Unsecured loans are written without collateral and therefore carry higher interest rates and harsher terms for most borrowers. Interest rates for unsecured loans are higher in parallel to the higher level of risk being taken by the lender.
Only borrowers with excellent credit ratings and the most stable employment/residential histories are afforded lower interest rates on unsecured loans.