Secured And Unsecured Personal Loans

Personal loans are basically an installment contract. This means that you borrow a pre-determined amount of money and repay it over time with interest on a set schedule. Your contract is closed when you’ve paid back your personal loan in full. Personal loans come in all forms, from credit cards to home equity lines of credit.

Personal Loan

 

The most common form of secured personal loans is a home equity line of credit (also called a HELOC). This is where you pledge your home as collateral for the amount of the credit line. In return, the lender typically charges a low interest rate and extends the term of your loan. Depending on how long you keep up your payments, you could pay as little as 3.9% per year on the line of credit, although that’s not the case with all lenders. If your credit score is above sufficient, you may also qualify for a low interest rate.

Personal Loan

Unsecured personal loans work in a slightly different manner. Instead of using your house as collateral, the lender uses the value of your personal assets – such as retirement accounts, stock certificates, money market accounts, and other depository receipts – to secure the funds. Again, the interest rates are usually rather low, and you will pay considerably less in overall interest than you would on a home equity line of credit.

Another option for securing personal loans is to apply for an online loan, which allows you to look at a wide variety of financial institution options from the comfort of your own home. There are two types of online lenders: traditional brick-and-mortar companies, and independent financial institutions that do business via the Internet. With a traditional bank, you visit the institution, fill out a loan application, and then have to wait for it to get processed before you can access the money you need. When you apply for an unsecured loan online, the process is so quick that you will typically be able to access the funds from your bank account within a few hours.

Security

The downside to these personal loan is the lack of security. Traditional banks are much more secure, as they often operate ties with large credit unions, whose members each carry a certain amount of financial risk. With an unsecured personal loans option, however, the lender is not under any obligation to provide you with collateral. You may end up getting scammed by an online lender who asks for a large sum of money without even having to verify any type of income or financial history. Because most personal loans are short term, it is important that you do some research on your prospective lender to make sure they are legitimate.

One of the biggest differences between unsecured and secured personal loans is interest rates. Unsecured personal loans typically have higher interest rates than do secured loans. However, there have been recent years when rates are decreasing for all but the very largest personal loans. It is a good idea to look around several lenders before applying for your loan. This way, if you find an interest rate that is too good to pass up, you can move on to the next available lender and continue your search.

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