So, where do you start? Below are three of the most important questions to ask when taking an unsecured personal loan:

1. Is the loan worth the expense?

This is the most important question you should ask anytime you borrow money, whether it’s a home loan, car loan, or an unsecured personal loan. You need to figure out if the reason you’re borrowing the money is worth not only the cost of the thing, but the interest and fees you’re going to be paying over time.

There are some good reasons you might decide to take out an unsecured personal loan. For example, you might take one of these out in order to pay off other, higher-interest unsecured debt such as debt from credit cards. That’s a good reason for the expense.

On the other hand, there are some reasons you shouldn’t, such as making a down payment on a car you can’t afford.

1. Can I repay it, and how?

You need to be specific about how you can afford to repay the loan. If you can’t afford another $200 a month in debt, then you shouldn’t take out the loan. Just because you think you need the loan doesn’t mean you should take it.

Part of this might be coming up with alternative ways to make money to pay the loan, such as getting a second job.

1. How much will it cost?

You need to figure out how much the loan will cost over the life of the loan. Know your interest rate. Don’t get suckered in by a payment amount. Focus on the actual terms of the loan and you’ll be fine.

Accordingly, you should shop around at least a little bit for your loan to make sure that you’re getting the best possible terms available to you.

Photo via laurakgibbs

Unsecured loans

An unsecured loan is a loan that lenders believe you can pay off on your own financial merits.  There is no collateral that you are putting up when you apply for this type of loan.

Unsecured loans often come in smaller amounts and are quite possibly the most common type of personal loan.  The amount size will vary depending on the lending institution.  The repayment of these loans is also usually on a short-term basis.  Lastly, the biggest downside is usually the interest rate.  Unsecured loans often carry a higher interest rate due to you not having to put up that vintage record collection as collateral.

Secured loans

A secured loan is a loan that is backed by some sort of collateral.  This collateral is something of greater value than those old Kiss 45s that you have in your basement.  The collateral is often the house that those 45s reside in.

Payment and interest terms are also vastly different from the unsecured loan.  Often you are borrowing a larger amount of money.  You are not going to get a secured loan for that TV you have your eye on.  The repayment of these loans is often measured in years greater than five.  It is not uncommon to see a secured loan hit the ten-year to thirty-year repayment plan.  The interest rates for secured loans are often smaller as well.

Now that we have hit what the differences are, what items often fall into these categories.  Here are a few examples of what products will fall into what loan type:

Unsecured loan products:

• Personal loans
• Smaller educational loans
• Home improvement loan

Secured loan products:

• New home mortgages
• Recreational vehicles like boats and off road vehicles
• Larger, long-term educational loans

A word about home equity loans

You will notice that some items fall into both categories.  Educational loans are one of the more common loans to fall into both categories.  The reasoning can simply be broken down into the duration of the loan and what you are using to get the loan.  If you put your house as collateral, you are going to get a lower interest rate than if you just apply for the loan.

Knowing what kind of loan you are going to apply for will be a big advantage to you.  You will now know that you cannot get ten year financing on that shinny new TV that you want.  A little bit of research on your personal loan can mean the difference of a few thousand dollars in the long run.

Photo via King Chimp

You need to understand, first of all, that an unsecured personal loan involves no collateral. As such, the interest rate is going to be higher. Why is this? Because the lender is at greater risk. If you stop making payments, the lender has no recourse (other than the collections process).

Most of the time, a personal loan will require a credit check. The lender needs to be reasonably sure that you can and will pay back the personal loan. Personal loans that don’t require a credit check tend to be more along the lines of high interest short term loans, often known as “payday loans” in many places. Payday loans are related to personal loans, but they’re not the same.

The process of applying for a personal loan is usually pretty painless and easy. You fill out an application, and give permission for the lender to run a credit check. They’ll look at your income, job status and credit, and review your application. They’ll make a decision about whether to offer you the loan and then, if you want to continue, draw up a promissory note for you to sign.

In some cases, a personal loan may be available the same day you apply. In other cases, it may take longer and you might need to wait.

If you’re using the personal loan to pay off debt, you can save a great deal of money in interest. In fact, this is one of the most common reasons that people take out personal loans. Some financial institutions will even offer to directly pay credit cards, for example, if you want to use the personal loan to pay off debts.

Photo via brain_blogger

A personal loan is a loan you take for, usually, an unspecified purpose. You may want to use the cash to pay off some credit card debt, or you may want to use it to pay for a cruise. A personal loan differs, of course, from a home loan or a car loan. Those loans are used, of course, to purchase a specific item.

Secured loans

In the most basic sense, a secured loan is a loan that’s backed by something valuable that you provide. Typically, this will be a property of some sort. A home equity loan or a second mortgage would fall into this kind of category. The thing of value is known often as a “security.”

According to the law, if you take out a secure loan, you’re entitled to better conditions than if you take out an unsecured loan. That will likely be a lower interest rate, or it may be longer payback terms, or some combination of both of these.

A secured loan often requires appraisal fees, which can get expensive in some areas. Depending on how much you’re borrowing, the appraisal fee may not be worth the loan. On the other hand, if you’re borrowing a large sum of money, the appraisal fee may be relatively small in comparison.

You may also be required to carry insurance on the security, as well. If you take out a home equity personal loan, it’s likely you’ll be required to carry homeowners insurance. Chances are good you already do, but if not you’ll probably have to buy it.

Unsecured loans

An unsecured loan takes the risk away from your property. You don’t provide anything of value as collateral for the loan. This, of course, increases the risk to your lender. Given that, the lender will ask for compensation for that risk. This compensation comes in the form of a higher interest rate or a quicker payback term.

The requirements for unsecured personal loans are stiffer. The lender will take a close look at your credit report, your employment status and your financial history. While you’ll likely go through the same process with a secured loan, lenders have higher standards when it comes to unsecured personal loans.

No matter what kind of personal loan you opt for, make sure you have all the facts. Get the terms from the lender, and do some comparison shopping. Unless you’re in a tremendous hurry due to an emergency, it’s almost always worth waiting a few extra days to make the right decision.