For those new to borrowing, dealing with financial terms can seem like wading through unknown, murky waters. Secured personal loans, unsecured personal loans, fixed interest rates, variable interest rates, all these terms are not necessarily self-explanatory. Fortunately, these terms are quite common in the financial world, particularly in the lending area, and once learned even a financial novice will soon be able to spot just the type of loan they are looking for.
Personal loans are loans extended to an individual or a married couple. Common personal loans include student loans, vehicle loans or a loan to purchase a home. Secured loans are those loans which require something to be held as collateral in order to obtain the loan. Boat loans, vehicle loans and home mortgage loans fit this category. The good news is that these types of loans typically have a lower interest rate than unsecured loans. The bad news can occur if a borrower should stop paying on the loan, as the lender has the right to repossess whatever was put up for collateral on the loan, whether it was a home, a vehicle, etc.
Unsecured loans are typically extended when a borrower would like extra money for a vacation or perhaps unexpected hospital bills. If the borrower stops paying the loan, there is nothing the lender can repossess from the borrower. However, the interest rate for these loans is typically higher than those for an unsecured loan to compensate for the lender’s extra risk.
Fixed rate loans will have a specific interest rate determined when the loan is first initiated and this rate will remain unchanged throughout the life of the loan. A variable interest rate will begin typically at a very attractive rate, but is subject to change usually at the end of a 3, 5 or 7 year term. Variable rate loans are often used by homeowners who have a career that requires frequent moves. If they know they only need a home for 2 years, they can save a substantial amount in interest with a low-rate loan and then sell the home before any adjustments are made to the interest rate.
However, if something unexpected occurs and the homeowner decides to stay in the home long-term, they may be subject to a significant increase in the interest rate applied to their loan. It is also possible that loan rates may have fallen since the rate was first applied and in these cases, the borrower may actually be able to get a lower interest rate to finish out their loan.