Personal loans are often used by consumers to purchase small- to medium-sized items, such as appliances, furniture, and gifts. They are also used to help cover unexpected and sudden expenses that life throws at everyone. No matter the reason, finding a personal loan with an acceptable interest rate is amongst prospective borrowers’ top priorities. Like most types borrowing though, the interest rates offered will vary depending on a particular borrower’s credit score, employment situation, outstanding debt, and type of personal loan they would like to take out.
By type, we mean “secured” or “unsecured.”
Secured personal loans refer to those that require collateral. Collateral is an item of value that’s offered to a lender as security for the money they’re lending. In the event a borrower defaults on their loan, the lender is then permitted to liquidate the borrower’s offered collateral in order to redeem their lost money.
As a result, those who opt for secured financing should make sure they will be able to repay their lender. Falling into debt and losing a piece of collateral can propel borrowers into an even worse financial position than they started in.
But there is a positive side to secured loans. Since collateralized loans provide lenders with security, they tend to be easier to qualify for.
Some of the most common forms of collateral include:
- automobile titles
- home equity
Unsecured personal loans, on the other hand, do not require collateral. But there’s a tradeoff: since no security is given to lenders, unsecured financing is typically associated with higher interest rates and more stringent qualification requirements. It’s not uncommon for lenders to reject unsecured applicants if they have anything less than a pristine credit score.
For example, the trusted lending partners that loans.org works with will usually only accept unsecured loan applicants with a credit score of 640 or greater. Those with lower scores can still get a loan, but they must secure it with some sort of collateral.
Some wonder why such strict credit requirements exist. Consider the following stats, brought to us by Economy Watch:
- The average household carries $6,500 of debt.
- Nationwide, one in every 160 people filed for bankruptcy in 2010.
- Three years ago, the average debt per person in the United States was $7,800.
- Since the end of 2008, credit lines totaling $751 billion have been closed.
Given the state of our economy and the recent trends depicting financial distress across the nation, lenders must evaluate their risk and lend accordingly.
Regardless of the type of personal loan you wish to apply for, make sure to do your homework. We have a broad range of FAQs that prospective applicants can review prior to borrowing money. We also publish articles and news stories for those interested in learning even more about this type of financing.