A personal loan is money that you borrow from a bank or financial institution and use for your own needs. This money does not have to to a specific expense or loan reason. It can help you pay for things like medical bills, car repairs, vacations, or other purchases.
The personal loan may either be secured or unsecured, depending on the lender, the loan size, your credit profile, proximity to a physical branch and/or many other potential requirements; some of which are discussed below.
Let's examine some of the key features of each type of loan.
1. One of the key features of a secured loan is that it is backed or “secured” by collateral. Collateral can be many types of physical possessions, such as personal property like TVs and computers, or a car or house. Conversely, an unsecured loan does not involve any type of asset or collateral to back it up.
2. When a borrower takes out a secured loan, they put their assets at risk, but in some cases may get a lower interest rate or a loan amount. However, an unsecured loan could come with higher interest rates because of the potential for a higher risk of loan default.
3. In some cases unsecured loans, especially for higher loan amounts, may only be available to borrowers with higher credit ratings.
4. The repayment periods for secured loans can often be longer than those for unsecured loans. This allows more time for repayment but can result in increased overall costs in terms of interest charges depending on other aspects of the loan.
5. Some financial institutions prefer secured loans because they offer additional protection against default; therefore, it may be easier for individuals to get a secured loan than an unsecured loan.
6. If a borrower cannot make payments on a secured loan, there is the possibility that the lender could seize their collateral. This collateral acts as a form of guarantee for the lender and gives them security if the borrower defaults on the because the contract typically states that the collateral can be taken by the lender if the loan is not paid. However, there is no such consequence for an unsecured loan.
How do I pre-qualify for a personal loan?
To pre-qualify for a personal loan, you'll typically need to fill out a pre-qualification application online or visit a branch depending on the institution’s requirements, and you may be required to provide proof of your income. Lenders will review your application and supporting documents and decide whether you may pre-qualify for a loan. They may also ask you to provide proof of your identity, income, employment, credit history and other documents that can help validate your ability to repay the loan. This is if you decide to complete a full application.
Which is better?
This really depends on the lender and the borrower’s situation. Each loan type has features that make it unique for the individual borrower.
Whichever personal loan option you choose, the thing is that you understand the terms and conditions.