Unlike payday loans, personal loans are larger sums of money that you borrow over a long period of time.
The interest costs for personal loans can vary from lender to lender and will depend on whether the loan is secured or unsecured.
What is a Secured Loan?
A secured loan is a loan that is secured against an asset, such as your car or even home. If you are unable to repay the loan, the lender can sell your asset as a way of getting it’s money back. Whilst the APR interest rate on a secured loan tends to be less there could be additional fees and charges.
What is an Unsecured Loan?
Unlike a secured loan, an unsecured loan does not need an asset to guarantee the loan against. However, like any form of borrowing, you will need to repay the loan in full. If you fail to repay it the lender could take legal action against you in order to get its money back. It’s vital that you repay an unsecured loan in full as, if you default, your credit score could be severely damaged – meaning that you could be barred from taking out credit cards or personal loans for a number of years.
However, there are alternatives to unsecured loans, such as guarantor loans.
The only difference with guarantor loans is that they are secured against the word of a “guarantor” (a person who promises to repay the loan on behalf of the borrower). Whilst this tends to be a good form of borrowing, if neither you or your guarantor are unable to repay the loan then there could be serious implications.
In spite of the obvious advantages and disadvantages of each form of borrowing mentioned here, the main advantage is the positive affect they could have on your credit score if you repay them in a timely manner.
As a consumer you have a duty to protect your own interests and understanding the benefits of pitfalls of different types of lending is a significant step in the right direction.
To find out more about borrowing money and finding the right product for you, check out our other financial guides: