Personal loans are usually short term loans to be paid back within a short amount of time, typically two to five years. Unlike a mortgage or car loan a personal loan can be used for any reason the borrower would like to use the money for such as a vacation or wedding.

 When it comes to personal loans there are two basic types, secured personal loans and unsecured personal loans.

Secured Personal Loans

With a secured personal loan the borrower puts up something as collateral be it personal property or other asset. If the borrower defaults on the loan the lender gets the property. These loans typically come with a lower interest rate as the lender has less risk. Secured loans are also available at many credit unions as “share secured” loans. These loans are backed by the borrowers account balance. Much as if you were to borrow form yourself. The advantage with a secured loan is the lower interest rate. The disadvantage is that the asset put up as collateral can be tied up for the duration of the loan.

Unsecured Personal Loans

Unsecured personal loans are more common. With an unsecured personal loans (they are also called signature loans) the lender accepts the lenders word or signature that the loan will be repaid. The lender has considerable more risk with an unsecured loan because in the event the borrower defaults on the loan it will be much harder to get the debt repaid. For this reason unsecured loans come with a higher interest rate than a secured loan. The interest rate is determined by the borrower credit worthiness. Credit worthiness is many times determined by the borrowers “credit score“.  The credit score factors the past borrowing history of the borrower and the likelihood the loan will be repaid according to the terms in the loan. Because of this it is difficult for people without a credit history to obtain an unsecured personal loan and they will pay a much higher interest rate for the loan.

Many banks and credit unions offer personal loans. It helps to have a prior business relationship with the lender such as a checking or savings account.