What Is a Secured Personal Loan?

Personal loans are normally issued against some kind of security, like your house or your car or some other substantial property. This is called a secured personal loan. For example, consider the mortgage on your house or your car note. You take a loan from the bank pledging these items of property. This means that if you default with the payment, the bank is authorized to repossess your house or car as the case may be, and sell it off to cover the remainder amount. So what is an unsecured personal loan?

What Is an Unsecured Personal Loan?

When you take an unsecured personal loan, you do not pledge anything against it except yourself. This poses a risk to the lending person or organization, because the repayment is not guaranteed. If you default, the lender has little option of recovering the loan amount and must write it off as bad debt. For this reason, an unsecured personal loan usually comes with a heftier interest rate and stricter terms than a secured loan.

When to Take an Unsecured Personal Loan

When should you need to take out an unsecured personal loan in spite of the enhanced rates? This type of loan comes in handy when you want to consolidate several loans into one single fat loan. You will normally want this when you want to reduce the complexity of your financial affairs and simplify matters. Instead of having to deal with several loans at several rates of interest at different points of time, you unify them into one large loan at one rate of interest, payable on a certain date every month.

Unsecured Personal Loan: Behind the Scenes

What happens in effect is that the organization issuing the unsecured personal loan buys off all your existing loans and becomes the sole creditor. The interest rate, worked out from an average of your several present rates, tends to become fixed, which is useful in times of rising national rates.

Whether to take out an unsecured personal for getting this benefit, in spite of the enhanced rates, depends on where your priorities lie.