Personal loans are some of the most important (and common) financial vehicles that are used to obtain necessary liquidity. The mechanics are quite simple. A borrower will approach a lender and request a certain amount of money. After determining the risk that the customer may pose, the lender will either approve or deny this request. The amounts can vary widely, as will their interest rates. The individual will be required to repay the initial amount as well as the interest that has accrued over time. While this may be done in a lump sum, it is common that monthly installments will be made. In the case of an extremely large loan, the repayment period can total a number of years.

Secured Personal Loans

A secured personal loan is a loan that involves collateral. This asset is used to back the loan in question and it will also ensure the lender that should the loan fail to be repaid, these assets can be collected and used as collateral. A common example of a secured personal loan can be seen in a mortgage or an automobile loan. Should the terms not be fulfilled as initially agreed upon, the home or car can be seized. As these loans are considered more stable, interest rates are lower and approval is easier.

Unsecured Personal Loans

Loans that are not backed by any assets are considered to be unsecured. Some examples can be credit card loans or student loans. Because these loans literally “trust” that the borrower will make payments on time, approval will revolve around a high credit rating. Also, interest rates will tend to be higher; the lender will naturally be taking more of a risk. It should be realised that if one is turned down for an unsecured loan, there is still the possibility to be approved for a secured loan.

Things to Take Into Consideration

The main metrics to consider are the amount to be borrowed, the repayment period and the associated interest rates. Thus, one will be able to obtain a realistic picture as to whether or not the loan is financially feasible. If any of these factors are in doubt, it is wise not to pursue a loan.

How to Get the Best Deal

First and foremost, it is critical to compare and contrast the interest rates associated with either type of loan. However, some other variables to keep in mind are:

  • The reputability of the lender.
  • The amount of contact information.
  • The penalties should a late payment occur.

Of course, it is always recommended to seek third-party advice if any of these factors are unknown or in question.