Types of
Personal Loans

When applying to a lender for a personal loan, you will want to know exactly what type of personal loan you wish to obtain. Several factors may enter into your decision:

• The amount of money you want to borrow;
• The length of time involved in paying back the loan;
• The interest rate; and
• Whether or not you have collateral.
• There are three main types of personal loans. Following are the advantages and disadvantages of each.

Secured Loan

A secured personal loan is a loan in which you offer up some form of collateral as a guarantee. Usually this is your home, but it can also be other real property such as a car, land, or buildings. Home owners have a good chance at qualifying for a secured loan. And since collateral is being offered, the lender does not worry as much about you defaulting on the loan. If you do not pay, they simply repossess your home or car and sell it to pay off your loan.

The advantages to a secured loan are almost always lower interest rates which mean lower monthly payments for you. With the lender’s risk reduced, because your collateral, he or she can offer better terms.

The disadvantage can be serious. You could lose your home, or whatever real property you offered as a guarantee, if you default on your payments. Because it is often your home that is the collateral, you want to think long and hard before risking it on a short term loan. Make sure you fully understand the terms of your loan before committing yourself.

Unsecured Loan

An unsecured loan is one that does not require collateral. You will not need to own your home for this type of loan. They are usually processed quicker than a secured loan because all you need is your lender’s application and a credit report. You must have good credit, as a rule, for this type of loan. Unsecured loans are often for smaller amounts than a secured loan. Advantages to an unsecured loan are that you don’t have to be a property owner or have collateral. These loans are fast which can be a definite plus if it is for an emergency.

The main disadvantage is the amount of interest you will pay. Since the lender requires no collateral, he charges higher interest rates to make up for it.

Line of Credit

This is similar to the terms of a credit card. Your lender issues you a line of credit. How much that will be will depend on your needs and what you have in collateral. Once the amount of credit is determined, for example $5,000.00, you write your own loan, up to the limit. As you pay down the loan, you qualify to use it again and possibly qualify for higher credit limits. As with the other two types of personal loans, you have a monthly payment and a deadline for paying back the loan.

The disadvantage to a line of credit can be getting caught up in the continual purchasing that can happen with credit cards. Double check the fine print and make sure you know what your terms are before signing.