February 8, 2012

So many people today are muttering to themselves, “I need a loan.” If you are one of them, you may have already started looking around for a loan program that meets your needs and that will provide you with a monthly mortgage payment that you can manage. By taking just a quick look around at the loan programs available, you likely realized very quickly that personal loans are broken down into two major loan types. These types are unsecured personal loans and secured personal loans. So what are the differences between these two options, and which one is best for your needs?

Secured Personal Loans
Secured personal loans are those that have an asset of value tied to them as collateral. Real estate mortgages and car loans are two common types of secured loans. When you apply for this type of loan, generally, the bank or lender will review the collateral to ensure it has a value that meets or exceeds the loan amount being requested. For real estate, this valuation is often completed through the use of a property appraisal. Other assets may also be used for a secured loan, such as jewelry, a boat, farm equipment, and more.

The Benefits of Drawbacks of Secured Debt
Secured personal loans are often used to purchase the asset that will be used as collateral, but this is not always the case. For instance, a car may be owned free and clear, and you may opt to get a car loan and use the loan proceeds to pay off debts or for some other purpose. Generally, because the bank or lender has collateral in place, the interest rate offered is lower than you will get with unsecured personal loans. However, when you default on personal loans that have assets as collateral, the bank or lender could take that asset from you. For instance, if you fail to make your mortgage payments, the bank could foreclose on your home.

Unsecured Personal Loans
Personal loans that have no collateral tied to them are known as unsecured loans. These can be used for a variety of purposes, including as debt consolidation loans, to make repairs to a home or car, or to purchase an asset of value when you do not want to pledge that asset as collateral. If you default on these loans, the banks have no recourse to obtain their money back from you such as foreclosure or repossession. Because of this, these loans are riskier for a bank to make. This increased risk is reflected in a higher rate on the loan. However, in general, the interest rate on these personal loans is far lower than what most people are paying on credit card accounts.

Which Is Right For You?
Most people will find that they can benefit from the lower interest rate that is offered through secured personal loans. However, in order to qualify for this type of loan, you do need to either be purchasing an asset of value or already own an asset of value that you are willing to put up as collateral. A lower interest rate will reflect in a lower monthly payment for you. Some people, however, do not have an asset to use as collateral, and others have assets but do not want to use them as collateral. In this case, unsecured personal loans are the best solution.

Applying for Personal Loans
If you have made a decision about which type of loan to apply for, you are then read to shop around for rates. Often, using an interest rate comparison website can help you to find the lowest rate possible on your loan, and these rate comparison sites are available for both unsecured and secured financing options. The application process for both options is fairly similar. However, when an asset is being used as collateral, the bank or lender will need to gather information about that asset to determine its value, quality or condition, and so forth. Often, assets of higher value such as a home will require greater documentation than assets of lesser value like most types of cars. Depending on the type of loan you have applied for, the application, loan processing, and underwriting stage may take anywhere from a few hours to several weeks.

Most people will need to apply for several loans over the course of their lifetime, and so understanding the differences between these types of loans is useful. Consider the options carefully as you decide which is best for your current situation and needs.