Types of Personal Loans

Answer 1

At various times in your life, you might need to take out a personal loan. Personal loans can help people get out of debt, make a major purchase, take a vacation, or do any number of other things. Of course, personal loans are a major responsibility. Before taking out a personal loan, it is important to understand the different types of loans available as well as the pros and cons associated with each. Loans break down into two major categories. There are unsecured loans and secured loans. Here is some background information on each.

A secured loan means you use an asset as collateral. With auto loans or mortgage loans, your car or house serves this function. The lender gives you the loan, and you are responsible for repaying it. If you fail to do so, they can repossess the collateral. There are other secured loans as well. A home equity loan is the most common. This means you take out a loan against the equity you have in your home.

One advantage of secured loans is that you will get favorable interest rate. Since the lender has collateral involved, the risk isn't as great. You can also qualify with less than strong credit. Again, the reason is because the lender has recourse if you default on the loan. On the downside, you are putting an asset at risk. If this is your home or car, that is a major thing to put on the line. Before taking a secured loan, you should make sure you won't miss any payments.

An unsecured loan is one that doesn't require collateral. This means that you aren't putting anything on the line, and that can be very appealing. Should trouble arise and you can't repay, you wouldn't lose your home or car. Unsecured loans have interest rates that are better than those of a credit card, so it can help you reduce debt.

On the downside, an unsecured loan will have stringent credit requirements. The lender is taking a greater risk than they would if the loan was secured. Without strong credit, you probably won't qualify. Also, interest rates won't be as good as a secured loan. This also ties in with the risk that the lender takes.

Before pursuing a loan, it is smart to get an idea of what interest rates are like. Ask a financial expert to review your credit report and see what might be the best option for you. With any loan, it is important to not get in over your head. That can lead to disaster.