A lump sum of money borrowed from a bank or other financial institution may be considered a personal loan. Personal loans are simply loans for personal use. Personal loans may be used for debt consolidation, paying bills or to purchase something. It may help to know the different types of personal loans available before applying to choose the most appropriate option.
Secured Loans
A secured personal loan often is used to purchase a home or car, and the item bought becomes the collateral for the loan. If the loan goes into default, the bank or financial institution then can take the collateral. A secured personal loan also may be tied to another purchase, such as a boat or RV, and the same rules would apply. The interest on secured personal loans may be lower due to the lower risk associated with them.
Unsecured Loans
An unsecured loan doesn't require a house, car or other piece of property to be tied to the loan, but the interest rate may be higher. Most lenders will conduct a credit check as part of the application process for an unsecured loan, and acceptance or denial will rest highly on past credit. The financial institution in charge of the loan likely will want to know what the loan is for. If the loan goes into default, the lender could pursue legal action to receive the balance of the loan, as opposed to repossession or foreclosure.
Short-Term Loans
Short-term loans typically carry a higher interest rate because the repayment period is much shorter than other types of personal loans. The maximum amount a borrower can take out may be much smaller with a short-term loan. According to iseekloans.com, banks may offer only up to $20,000 for a short-term loan.
Payday Loans
According to Yourcreditadvisor.com, payday loans may be an option for people who need only a very small sum of money or who don't have sufficient credit to be approved for a bank loan. Payday lenders typically require an active checking account and postdated check and a verifiable monthly income. Interest rates on payday loans can run very high, up to and above 400 percent annually. Payday loans are short-term, typically about two weeks or the date of the borrower's next payday. On the pay date, the loan can be paid in full or just the interest can be paid and the loan rolled over for another two weeks. If the loan goes into default, the lender typically will attempt to cash the check for the full amount of the loan or the balance will be sold to a collection agency.
Title Loans
Title loans are similar to payday loans except that they require a vehicle title that has no liens against it. Instead of supplying a postdated check as collateral, the borrower signs and hands over their vehicle title and spare keys in exchange for a short-term loan. Title loans run from about $500 to $2,000 or more, and interest can be as high as 300 percent annually. Upon default, the car is repossessed and auctioned.
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