A personal loan is one that can be used for any of a wide variety of personal reasons, including such things as home improvement, auto repairs, medical costs, travel/vacation expenses, and bill consolidation. The two basic types of personal loans are secured and unsecured.
Secured Personal Loans
A secured loan is one that is secured or backed up by some type of asset that the borrower offers to the lender as collateral in the event that he/she should fail to repay the loan. Depending on the lender involved, virtually any asset of value can used as collateral for a personal loan, including homes, cars, boats, jewelry, and savings or certificate of deposit accounts. Essentially, the lenders want to ensure, in the event the borrower defaults on the loan, that the asset put up as collateral could be sold or redeemed for enough to fully recover their costs for making the loan. For example, if you use your car as collateral for a personal loan and then you fail to repay the loan, then the lender has the right to repossess the car and sell it in order to recover their money.
Unsecured Personal Loans
An unsecured loan is one that does not require the borrower to pledge any collateral; it is based simply on the borrower’s creditworthiness and backed by his/her signature and promise to repay. If the borrower defaults, the lender, having no collateral to repossess, will have to commence legal action in order to enforce the repayment of the debt, perhaps through garnishment of the borrower’s wages. Because unsecured loans are bigger risks for lenders, qualifying for one is usually more difficult than for a secured loan, and the interest rates also tend to be considerably higher. Furthermore, the total amount that can be borrowed for an unsecured loan is typically much less, and the repayment period (length) of the loan is usually shorter as well.
Advantages/Disadvantages of Secured Personal Loans
Secured loans offer several key advantages over unsecured loans. First, because the loan is secured by some type of collateral, the interest rates are generally lower than for unsecured loans. In addition, it is easier to get approved for these loans, so they are a better option for those who are just beginning to establish credit or who may have a shaky credit or employment history. Finally, you are able to borrow larger sums of money than what you can with an unsecured loan. The key disadvantage of a secured loan is that if you happen to default on the loan, you are likely to lose whatever asset you pledged as security for the loan. On top of that, defaulting will almost certainly do very serious damage to your credit rating, and you will probably find that it will be extremely difficult for you to get another loan for at least several years–unless, of course, you’re willing to pay a very high interest rate.
Advantages/Disadvantages of Unsecured Personal Loans
One main advantage of unsecured loans is that the borrower is not required to offer any collateral for the loan; consequently, he/she does not have to worry about losing a valuable asset if she/he should happen to default on the loan. In addition, the application process is usually simpler than for a secured loan, and it is possible to receive the loan funds much more quickly. One disadvantage of unsecured loans is that they are generally only available to those who have very good or outstanding credit, so they typically will not be an option for people who have not yet established a credit history or for those who have had recent credit problems. Another disadvantage is that the interest rates for unsecured loans are generally considerably higher than for secured loans.
Copyright © 2014 CreditnDebtHelp.com