Personal loans may come in two forms: unsecured and secured. The unsecured loan is riskier for lenders and depends solely on the hope that borrowers will repay their loan, and the lender’s recourse if a loan is unpaid is often to go to court to demand repayment. Very good to excellent credit ratings are usually required for these loans to make this scenario less likely. The secured personal loan is different because it is backed up by giving the lender rights to some kind of property (collateral), which the lender may seize if the borrower stops making timely payments.
There are many different types of collateral that could be used to create a secured personal loan. These could include loans against property like homes, vehicles or land. Particularly with homes and land, this may be called taking a mortgage out on the property. Other types of collateral might be acceptable in creating such a loan, and might include such things as personal savings accounts that would be held by the lender, stocks or bonds, or luxury items of significant value. Typically value of the collateral is higher than loan value or a significant percentage of the amount loaned.
Lenders often prefer the secured personal loan because it has built-in protections, and banks or other money-lending associations may be more likely to approve a secured loan than an unsecured one. Some lenders may demand collateral when a person applies for a personal loan, especially if credit score is only moderate and is not excellent. That being said, not all personal loans are fully secured by collateral because value of property like land, homes, vehicles, stocks and bonds, and even luxury items can fluctuate and sink below the value of the loan.
Advantage to the borrowers also exists with this form of loan. Secured personal loan interest rates may be lower, due to the reduced risk the lender is taking. Especially when a personal loan is taken out against something like a cash balance in a savings account or a home, interest rate levels may be extremely competitive and some of the best. Particularly in the scenario where a person mortgages property, interest rates are likely to be very good.
Yet even with collateral, very poor credit may cause people to be turned down for a secured personal loan. People may still qualify for bad credit loans, but they pay high interest rates to obtain these. Another type of short term personal loan is available through pawnbrokers. People can “sell” property for money and have a certain period of time to redeem the property at a higher rate. The fees charged are typically expensive, but pawning could be called a type of secured personal loan, since money is initially lent against the value of an item.