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The Skinny on Secured vs. Unsecured Personal Loans

Posted December 1st, 2009
by Staff

SkinnyJeansIf you’re thinking about taking out a personal loan, you may be inundated with options. Especially for the person with decent credit, it may seem like there are lenders lining up to give you money. In today’s economic environment, however, you need to be careful. Interest rates are near their all time low, and everything from home loans to payday loans can seem like attractive options.

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.



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