What Are the Two Basic Types of Personal Loans?

While there are many variations of personal loans, there are two basic types. These are unsecured and secured personal loans. Unsecured loans are based only on your ability and proven willingness to repay a loan according to the terms agreed upon in the loan contract.

Secured loans are backed by collateral, which must be surrendered if the loan is not repaid in a timely manner. Secured personal loans are available to those who may not have sufficient income to obtain a loan or whose credit history may be blemished by late payments or defaults on previous loans.

What do you need to get an approval for an unsecured personal loan?

A lender will depend on several factors in determining whether to approve an unsecured personal loan


Your present income as well as your employment history will be used to assess your current and future ability to repay an unsecured loan. Your income must be sufficient to pay both your living expenses and your loan payments without undue hardship.

Your debt-to-income ratio is also considered, even if you always pay your bills on time. If you have numerous other bills such as credit-card debt and car payments, your income may not be sufficient to withstand even a short period of unemployment or another reversal of fortune.

Credit history

This is the second primary factor in determining your eligibility for an unsecured loan. If you have a history of late payments, judgments, or bankruptcy, you will likely be considered to be too risky for an unsecured personal loan.

Secured personal loans

A secured personal loan is an option for a borrower who wants to borrow more than their income would allow with an unsecured loan or whose credit history is blemished.

Collateral for an unsecured loan can come in many forms. The collateral can be as simple as an item of value such as a piece of jewelry or a musical instrument that is held at a pawn shop until a borrower repays a loan, or it could be equity in a home or vehicle that a borrower uses to guarantee repayment of a loan.

Secured personal loans are riskier for both the lender and the borrower because default can mean litigation for the lender and loss of property for the borrower. Greater risk for the lender will also usually mean higher interest rates and less favorable repayment terms.

Borrowers should always think carefully before risking their vehicle or home for a secured loan. This type of personal loan should be used for an essential need or important investment, rather than for frivolous pursuits and purchases.

About Me

Keeping Your Financial Wits About You

A few months ago, I realized that maintaining a healthy financial situation was about more than simply making a budget and sticking to it. It was also about being able to stay calm and think rationally when you came across something you really wanted to buy, also known as impulse buys, if you will. I started focusing on identifying and avoiding impulse buys, and it made a huge difference in my personal and financial life. I was able to think more rationally about what I wanted and why, and I was really pleased with how much easier it made my finances. This blog is all about keeping your financial wits about you.