Personal Loans: Secured vs. Unsecured

If you are short on cash and wonder if personal loans might help you out of a rough situation, then you should know the basics of this type of loan. A personal line of credit can be somewhat difficult to achieve through a traditional bank or credit union now; financial institutions have had to tighten their belts during the roughest part of the economy and personal loans were the first product to get cut. However, even if you can’t get a loan through traditional means, personal loans are often given between family and friends. Peer to peer lending is another way to obtain a personal loan through a nontraditional means.

There are two main types of personal loans: secured and unsecured. Although they are similar in that you can use the funds to cover everything from a car repair to a vacation, they each carry a different degree of risk for the lender. They usually have different rates of interest and payback terms. Depending on your credit history and the amount of funding you need, one may be better for you than the other.

Secured Personal Loans

A secured personal loan is one in which you pledge collateral against the value of the loan. Collateral is valuable property that the lender can collect to defray the loan balance in the event you default on your line of credit. If you are planning to apply for a secured loan, bring a professional appraisal of the value of your collateral with you—this will help you prove its value to the lender. Anything of value can be used as collateral, but typical items include jewelry, cars, real estate, and antiques. Because secured loans pose a lesser risk to the lender, they generally have a lower interest rate and more lenient payback terms.

Unsecured Personal Loans

An unsecured personal loan does not require collateral. When making this kind of loan, the lender assumes the risk of lending you the money with no claim to any property should you fail to repay the loan. This makes them somewhat difficult to obtain if you need a large amount of cash, and because these loans do pose a greater risk to the lender, they generally carry a higher interest rate and more restrictive payback terms. This loan type has been hardest hit by the recession, making it very difficult to obtain through a traditional financial institution. However, it remains one of the most popular ways for friends and family members to loan cash to a loved one in need.