Multipurpose describes personal loans. From anything practical to something frivolous, personal loans can be counted on. They are also all-encompassing, catering to any consumer demographic including those with bad credit.
An important aspect of personal loans is whether there is an asset to back your loan. Collateral or the lack of it makes a loan secured or unsecured.
Between Secured and Unsecured Personal Loans
From there, it’s easier to see how each type of personal loan works in these terms. Let’s start with secured loans’ good points.
- Easier qualification. Secured personal loans are easier to qualify because there is the collateral to guarantee repayment of the loan. The presence of a valuable asset somehow eliminates the need to verify income.
- Lower interest rate. Secured personal loans are offered at rates lower than their unsecured counterparts because of the collateral.
- Higher loan amount. The presence of the asset as a pledge to the loan enables you to borrow more.
Unsecured personal loans, on the other hand, have these strengths to back them up:
- Risk of losing something? Nada. It’s true that an unsecured personal loan represents a higher risk to the lender, as evidenced by a higher rate. But should you fail to repay your loan obligations, you stand to lose nothing material. No house, car, bond certificates or any sizeable asset can be seized by the lender.
- Dischargeable debt. If you file for bankruptcy protection, unsecured personal debts can be discharged in the course of the proceedings. In the case of a Chapter 7 bankruptcy, unsecured loans are eliminated without repayment. A Chapter 13 bankruptcy, on the other hand, treats unsecured personal loans and similar debts as nonpriority general unsecured claims, which are often the last ones to be repaid, if ever.
Securing a Personal Loan
Whether you opt for an unsecured or secured personal loan, consider these points:
- Credit history. Regardless of whether you’re after a secured or unsecured personal loan, you’ll be evaluated based on your credit score and capacity to repay. If you have bad credit, the lender may require you to either put a collateral to lessen the risk or enlist a co-signer with a good credit. Just because you did not qualify for an unsecured loan doesn’t mean you won’t qualify for a secured loan, vice versa.
- Accessibility. There are a variety of sources when you are looking for personal loans. This can be said with respect to unsecured personal loans, which can be found in credit unions, peer-to-peer lenders, and even family and friends. Secured loans are more difficult to find and they’re often with traditional banks.
- Affordability. Your personal loan, secured or unsecured, should have an APR of 36%, which is an acceptable standard of affordability.
- Contingency. When you take out a secured loan, you could lose your home, car, or whatever’s asset that secures the personal loan if you neglect your loan. Be sure you understand this risk before signing on the loan document.