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Personal Loan

Personal loans may be secured or unsecured. A secured personal loan is one that requires some type of collateral as a condition of borrowing. For instance, you may secure a personal loan with cash assets, such as a savings account or certificate of deposit (CD), or with a physical asset, such as your car or boat. If you default on the loan, the lender could keep your collateral to satisfy the debt. An unsecured personal loan requires no collateral to borrow money. Banks, credit unions, and online lenders can offer both secured and unsecured personal loans to qualified borrowers. Banks generally consider the latter to be riskier than the former because there’s no collateral to collect. That can mean paying a higher interest rate for a personal loan.

What are the different types of Personal Loan?

KEY TAKEAWAYS

Personal loans are loans that can cover a number of personal expenses.
You can find personal loans through banks, credit unions, and online lenders.
Personal loans can be secured, meaning you need collateral to borrow money, or unsecured, with no collateral needed.
Personal loans can vary greatly when it comes to their interest rates, fees, amounts, and repayment terms.

Understanding a Personal Loan

A personal loan allows you to borrow money to pay for personal expenses and then repay those funds over time. Personal loans are a type of installment debt that allows you to obtain a lump sum of funding. For example, you might use a personal loan to cover:

Moving expenses
Debt consolidation
Medical bills
Wedding expenses
Home renovations or repairs
Funeral costs
Vacation costs
Unexpected expenses

These loans are different from other installment loans—such as student loans, car loans, and mortgage loans—that are used to fund specific expenses (i.e. education, vehicle purchase, and home purchase). A personal loan is also different from a personal line of credit. The latter is not a lump sum amount; instead, it works like a credit card. You have a credit line that you can spend money against and, as you do so, your available credit is reduced. You can then free up available credit by making a payment toward your credit line.1 With a personal loan, there’s typically a fixed end date by which the loan will be paid off. A personal line of credit, on the other hand, may remain open and available to you indefinitely as long as your account remains in good standing with your lender.