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Personal loans come with higher interest rates than most other loans. If you’re wondering why, it’s because they’re not secured.
Secured loans
A secured loan is guaranteed by property and, therefore, has a lower interest rate. For example, a mortgage is a secured loan, guaranteed by the home itself. If the borrower defaults on the loan, the lender can take possession of the home to recoup the money on the defaulted loan. The fact that the lender has the collateral in case of default is part of what drives down interest rates on secured loans. In addition, the very fact that the borrower’s home is used as collateral ensures the lender that the borrower intends to repay the loan. Secured loans are considered good risks for lenders, and that is why they come with lower interest rates.
Unsecured loans
An unsecured loan does not use collateral. Since no property is used to guarantee the loan, it’s a greater risk for the lender. For example, if a borrower uses a home equity loan to obtain a $15,000 loan, the lender can be assured that the borrower won’t default on the loan because it is secured with the home. A personal loan -- one without collateral -- for the same amount is not as safe for the lender. Because of this, the lender charges higher interest rates to balance out the greater risk.
Even though the interest rates on personal loans are higher than those of secured loans, personal loan interest rates are usually still lower than credit card rates -- at least after the initial teaser rates. If a secured loan is not an option for you, then a personal loan still might be a better choice than a credit card.
If you want to determine whether a personal loan is right for you, www.LendingTree.com is a good place to start. There, you can fill out one simple form and compare offers from up to four different lenders to find personal loans with interest rates that work for you.