A personal loan can come in handy in many situations, whether it’s paying for an unexpected medical expense, getting funds for a wedding or consolidating high-interest debt. But which type of loan is right for your circumstances? Let’s look at the major types of personal loans and when they might make the most sense.
Unsecured vs. secured personal loans
A personal loan can be either unsecured (it requires no collateral) or secured (it requires collateral).
Unsecured personal loans
Most personal loans are unsecured, which means they don’t require you to use an asset — such as a home or car — as collateral. Whether you’re approved for an unsecured loan and your terms will depend on your creditworthiness, income, debt-to-income ratio and other financial factors.
Being able to get a loan without collateral means you won’t lose your property if you’re unable to pay it back. This also makes unsecured loans riskier for lenders, and the increased risk can mean a slightly higher interest rate than a secured loan.
Secured personal loans
A secured loan is backed by collateral. Collateral can come in many forms, including a house or car. Most lenders that offer secured personal loans let you use money — typically in a savings account or certificate of deposit — as collateral.
Unlike an unsecured loan, if you fail to repay a secured loan, you could lose your property. However, offering collateral as backing for the loan makes you less risky to the lender, and they’re more likely to approve your loan.