Different Types of Personal Loans

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Different Types of Personal Loans
Different Types of Personal Loans (Image: sxc.com)

Personal loans are given for any number of reasons, and security for loans may take various forms. The quality of the security should be reflected in the rate charged by the lender. Here are a few more facts about personal loans.

Definition

A personal loan is a loan made for any purpose not specifically defined or secured by a specific asset. Personal loans are usually made for general expense purposes.

Secured Loan

A general purpose loan may be specifically secured by a cash flow or asset. Second mortgages are usually loans for short-term cash flow needs.

Unsecured Loan

Unsecured loans have no specific claim on assets or cash flow. Instead, the investor looks to the general creditworthiness of the borrower.

Line of Credit

A line of credit may or may not be secured. It gives flexibility to the borrower by allowing her to borrow and pay down interest and principal on a regular payment plan without retiring the entire debt. Lines of credit come due when the line of credit itself is not renewed and the borrower must then pay off the entire balance.

Interest Rates

Any well-secured loan that can be paid off with the ample cash flow of the investor is a premium loan. Any additional backing provided by a specific asset sufficient to pay the entire loan further increases the risk cushion. These loans usually receive the lowest rate in the market. The interest rate on a loan is a direct function of ability to pay it back.

Credit Card Loans

Credit card loans are an example of hybrid loans carrying unsecured debt but requiring monthly payoff of principal and interest. Because the loan is due in full monthly, it is not a line of credit.

Unsecured Loans May Require Other Backing

Even though unsecured loans are not directly tied to a specific asset, lenders may require insurance or source of payment upon death of the lender. Details for accelerated payment due to financial duress or stress are specifically laid out in the loan agreement.

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