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Types of Personal Loan

Debt consolidation, home improvements and large purchases are just three of the top reasons why individuals may take out a loan. Personal loans allow individuals to borrow a sum of money which must be repaid in installments alongside interest.

Personal loans can be broken down into two categories: unsecured personal loans and secured personal loans. Secured loans require the borrower to pledge collateral against the loan. This means that if they default on the loan repayment the lender may take the item to cover the costs. The most common type of collateral is property but borrowers can also pledge vehicles, cash savings and more. As collateral reduces the risk associated with the loan, secured loans tend to have lower rates of interest.

Conversely, unsecured loans do not require the borrower to pledge any capital. As the lender carries more risk, these loans tend to sport higher interest rates.

As well as dividing loans into secured or unsecured loans, personal loans are also divided into tiers according to how much money you would like to borrow. Tier 1 loans are the smallest whereas Tiers 3 and 4 are the largest.

There are also a number of very specific loans available. For example, car loans or logbook loans are secured against the value of a new car and payday loans give borrowers a small amount of money which can be repaid at the end of the month.