Interested in getting a personal loan? First, it’s important to understand each type of personal loan available. You should also be aware of all applicable fees and charges applied to the loan, which vary based on lender, loan type, purpose, credit score, lender policy and more.
You can use a personal loan for a variety of reasons, from emergency expenses to travel. However, how you plan to use the loan may determine which type of loan you qualify for. Learn about each type of personal loan in the sections below.
There are two basic types of personal loans: secured and unsecured. Before submitting an application for a personal loan, it is essential that you fully understand both types to determine which one is best for your current financial needs.
A secured personal loan is one that uses collateral to guarantee your ability to fully repay a lender, regardless of the circumstances. Collateral is any item with monetary value that is equal to the amount of the loan. If you stop paying your loan, the lender has the right to compensate itself with the item(s) you put up as collateral. This security allows the lender to provide the loan with a lower interest rate.
You can use many items as collateral, such as:
· Your home(s).
· Your vehicle(s).
· Jewelry.
· Investments.
· Money market accounts.
It is up to the lender to either accept or reject the items as collateral. Generally, the item is related to the loan. For example, when you finance a vehicle, the lender holds the title until you fully repay the balance of the loan.
An unsecured personal loan does not rely on collateral, which means the lender is taking more of a risk by providing you with funds. As such, interest rates for unsecured loans are higher than they are for secured loans.
Lenders have strict qualifications for unsecured loans, like higher minimum credit scores and harsher employment requirements.
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