Types of personal loans

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Financial stability today is not an indication or forecast on how things will always be. For one reason or the other, you might find yourself in need of some cash injection to meet a need. When this happens, one of the best options you have is to go for a personal loan. As the name implies, this is the kind of loans extended by financial institutions to individuals to help them meet their own personal needs. Personal loans can basically be extended by banks, loan companies from both online as well as from brick and mortar offices, credit unions and can be grouped into 2 major categories. These are:

  1. Secured personal loans

  2. Unsecured personal loans

Secured personal loans

As the name suggests, these are the kinds of loans that require collateral or some form of asset security. Financial institutions require that you pledge an asset before you can be approved for this kind of loan. Most of the time, you can pledge as security your home, car, or any other kinds of financial assets that a financial institution might deem necessary. The idea of collateral is to enable financial institutions lending money recoup their money should you fail to repay the loan extended to you. It serves to cushion the lending entity against loss of the money they extended to an applicant.

Unsecured personal loans

In most cases, unsecured personal loans are extended on the basis of a person’s credit worthiness as opposed to their assets. In this regard, they do not require that a person pledges any of their assets as security. In any case, should a person fail to repay unsecured personal loans, the lender always takes legal actions against the borrower to recoup their money. The drawback is that as a result of the lack of collateral, lenders tend to charge a high interest rate as a result of the great risks involved with this loan instrument.

While there are many different types of personal loans you can apply in the market, it’s highly recommended that you choose wisely the kind to apply for based on their terms and conditions. For instance, you need to be conversant with the fact that secured personal loans have a negative impact on your personal assets should you fail to repay the loan as agreed. The Bank or financial lender in question might seize your property and sell it to recap their money. You also need to read the terms and conditions of the loans, understand all about the interest payments as well as what happens when you default payments for a couple of months.

Unsecured personal loans on the other hand do not mean that you need to sit back and relax because your personal assets are not on the line. If you value your credit score, then it’s essential that you make timely monthly payments as defaults could mean a dent to your credit rating. The probability of legal action is also something you need to consider as it would malign your name.

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