Americans regularly use every type of personal loan for a large variety of financial challenges. Whether it’s paying for a new home, a wedding, or just taking a loan to pay off other debt, there are countless lenders and loan products.
With so many personal loans available, it’s normal to not understand exactly how diverse personal loans can be. So, in this article, we are going to cover the most popular types of personal loans. We will go over their intended purposes and how they work.Best Personal loans
Unsecured personal loans
When speaking about loans, “secured” and “unsecured” refer to the presence or absence of collateral.
Unsecured personal loans are personal loans that do not require any kind of collateral. Without the security of collateral, lenders assess borrowers for personal creditworthiness. Those factors include personal credit score, debt-to-income ratio, and employment status.
There are many unsecured personal loans available to consumers. One popular example is a credit card, which doesn’t require any collateral to use.
Because unsecured personal loans are riskier to lenders, they often come with more stringent creditworthiness requirements. They are also normally more expensive for borrowers. However, they can be more attractive to many borrowers because they don’t require them to put a personal property on the line.
Typically, unsecured personal loans are only given out to creditworthy borrowers. However, unsecured loans come in several forms, including lump-sum personal loans and lines of credit. It’s normally more difficult to get approved for larger loans without providing collateral.
Pros of Unsecured personal loans
- No risk of losing collateral
- A common form of credit
Cons of Unsecured personal loans
- May come with higher interest rates
- Harder to qualify for in many cases
Secured personal loans
Secured personal loans are personal loans where the borrowers provide collateral to secure the loan. The loans are considered “secured” because lenders are provided security should the loan be defaulted on.
Secured personal loans are normally large loans. However, if a borrower has poor credit, lenders may require collateral for regular personal term loans.
Collateral for secured personal loans typically includes some kind of property. In many cases, the item that the borrower is purchasing. Mortgages and car loans are examples of secured personal loans where the collateral is the item being purchased.
In other cases, you can provide collateral that has nothing to do with the reason you’re getting a loan. The collateral provided is simply meant to cover the risk the lender is taking for providing you with a loan.
Because secured loans are less risky for lenders, they are normally cheaper. Borrowers can opt to provide collateral as a means to get lower rates.
Pros of Secured personal loans
- Often easier to qualify for
- Can be used to get lower interest rates
Cons of Secured personal loans
- The borrower must release collateral if they default
- If the collateral is valuable, asset loss can be more damaging