Money Matters

Which type of personal loan is right for you?

December 18, 2013 | Alliant Credit Union, powered by NerdWallet

When it comes to personal loans, finding the best option can be difficult for those of us who aren’t financial experts. Given the long-term consequences (good and bad) of taking out a personal loan, educating yourself before making a decision is crucial. With that in mind, let’s take a look at three major types of personal loans to learn more about which may be the best fit for you.

Unsecured
An unsecured personal loan can be difficult to obtain because it is not secured by anything more than the simple signature of the recipient of the loan. On one hand, this is a positive because the financial institution cannot seize your assets if you find yourself unable to pay back your loan; however, it also comes with some drawbacks.

Because there is no collateral that the financial institution can seize if the recipient defaults, these loans are typically only extended to those with a long history of very good credit.  Moreover, the additional risk taken on by the bank often necessitates a higher interest rate on the principal, and if default occurs the lending institution can take legal action against you. A representative from your credit union can best help you determine whether you are a strong candidate for this option.

Savings secured
A secured personal loan is one that is backed by collateral, which may take the form of a house, a car, or another large asset. In the event that you default on the repayment, your property may be repossessed.

On the plus side, you’ll face lower interest rates, lower APR and easier and faster access to a secured loan; on the other hand, your property can be repossessed, and if you’re taking out a loan for a mortgage, your house can be foreclosed upon if you can’t pay back the loan. In essence, secured loans are better for individuals with less than sterling credit but a stable financial future.

Savings secured term
What differentiates a savings secured term loan from a regular secured loan is that in the case of the former, no payments are required until the end of the term. When the term ends, the time has come to pay your principal along with the accumulated interest. While your savings account is used for the purpose of collateral, your money earns dividends over the course of the term to which the loan is subject.

The length of this term varies from loan to loan and from one financial institution to the next. Fees and APR can be particularly low for this type of personal loan, but be mindful of the risks of savings secured term loans: once the term of the loan is over, you can be hit hard by the requirements of paying it back.

While your credit union representative can help you decide which type of personal loan is right for you, understanding your options can help you feel more confident in your choice. Don’t be intimidated – having more information  can help you to make an empowered personal finance decision!

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