When you have decided that pursuing a personal bank loan is the right choice for you, the process of choosing the best bank loan for you can require some upfront knowledge about what types of loans are available. There are hundreds of types of loans out there available to the public offered by banks, private lenders, and other financial institutions, and knowing which type of loan is best for you can be tricky.
The good news is, personal loans are broken into two primary categories. Each category of personal loans has its own requirements, benefits, drawbacks and features. The two types of personal loans that are there for you to consider are secured personal loans and unsecured personal loans.
Within these two categories of personal loans, there are pros and cons, and similarities and differences to secured loans and unsecured loans that will make one or the other the right choice for you. Both these categories are further broken down into sub-categories based on the purpose of the loan and how the borrower uses the funds.
The main feature of a secured loan is that these types of loans require collateral to mitigate the risks of defaulting on the loan. Collateral is a type of security for the lender, which is held until the loan is paid in full. If you default on the loan the collateral is liquidated and its funds are used to pay off your debt.
Secured loans use houses (mortgages), car titles (auto loan), money market accounts, jewelry, and multiple other valuable items as collateral. Because of the security provided by the collateral, secured loans tend to have lower APRs than unsecured personal loans.
An unsecured loan, on the other hand, does not require collateral and therefore charges higher APRs on average. The amount of the APR depends a lot on the level of risk taken by the lender. If you have great credit and a reliable job you might get a low-APR unsecured loan but this is completely up to the discretion of the lender.
Online loans and bad credit loans are also both available. Online loans function the same as loans you get in-person from banks. Sometimes online loans offer better APRs and terms through promotions or when online-only lenders have less overhead.
Bad credit loans are available for borrowers with low credit scores and financial challenges. APRs and terms are often higher and less friendly for these types of loans so it is important to read the fine print before signing on the dotted line.