Personal loans encompass a wide range of financial products that are offered by banks and finance companies. These loans are not made for a specifically defined purpose, and can be used for just about anything. They are often taken to finance car purchases, personal holidays, higher education, home improvement and debt consolidation.
There are various types of personal loans being offered by many different lenders. What type of a personal loan you settle for affects both the interest rate you will be charged and the overall financial complexity of the loan.
The main two types you have to choose from are secured and unsecured personal loans, which come with either a fixed or variable rate of interest.
Secured Personal Loans
You can benefit from a much more favorable interest rate if you secure the personal loan with a major asset. The asset in most cases is your property or car, although other valuable items such as jewelry are also accepted. In the event that you fail to repay the loan, the lender has a legal right to take possession of this asset in lieu of your repayment
Secured personal loans are often recommended by the lender when the amount being lent is big. They are a good option if you are confident that you will be able to follow the terms of the agreement to complete the loan.
Unsecured Personal Loans
Unsecured personal loans are relevant if you do not own any major assets, or do not wish to put your assets at risk. The vast majority of personal loans fall into this category. These can be arranged much quicker than secured loans, since the money involved not as significant.
The interest rate charged, however, is more than what you’d have to pay for secured personal loans and goes further up if you do not have a good credit rating.
Fixed Interest Rate
Personal loans with a fixed rate of interest charge a specific rate for the first few years of the loan, following which a variable rate of interest is applied. Whether this goes to your advantage or not in the end depends upon the general economic situation for the duration of the loan.
Variable Interest Rate
For personal loans with a variable rate of interest, the rate continuously fluctuates throughout the duration of the loan. These fluctuations are usually in line with changes to the official cash rate, although they can also be changed independently by the lending institution.