Consumer Loans: What's the Difference?
Do you need to make a large purchase? Or maybe you’re dealing with an unexpected expense such as a broken dishwasher or replacing a heating and air unit. Are you trying to build or rebuild your credit? Whatever the situation, a consumer loan may be able to help you.
Once you’re ready to borrow money, you’ll want to compare interest rates, loan amounts, and terms before deciding what type of loan is best for you. The most common consumer loans offered are personal loans, unsecured loans, secured loans, and lines of credit. Let's take a look at the differences between each type of consumer loan.
A personal loan is an unsecured loan that does not require collateral. It allows you to borrow a lump sum of money up to a certain amount and repay it with interest over a set period. The monthly payments are fixed, which could be helpful when factoring it into your monthly budget.
In most cases, with a personal loan, your credit is a determining factor in the interest rate you will receive, and the loan terms are dependent upon the amount you borrow. Keep in mind, the less you borrow, the sooner you will pay it off. Paying for a vacation, medical expenses, home or car repairs, or an emergency are just some of the ways you can use a personal loan. You name it; there's almost no limit to how you can utilize the funds.
An unsecured loan does not require you to use collateral to qualify for the loan. The application and approval process is relatively easy, and it takes less time to disburse the funds compared to a secured loan. The most common types of unsecured loans are credit cards, personal lines of credit, and student loans. Keep in mind, both your overall credit and ability to repay the loan will determine the interest rate and how much you can borrow. In most cases, you're not limited on how the funds can be used. For example, you could use the funds to consolidate debt or pay for large expenses such as a medical bill or a major home repair.
With an unsecured loan, the borrower may have a higher interest rate and smaller loan amount compared to a secured loan. These loans are riskier for the lenders because collateral isn't required to secure the loan.
A secured loan requires collateral to get the loan. The most common types of secured loans are auto loans, mortgages, secure credit cards, and secure personal loans. However, different financial institutions may require different forms of collateral. For example, the collateral could be money held in a savings account, or it could be real estate or a vehicle. If using money as collateral, it is set aside in a designated account (typically a savings account) and held in the account until the loan is paid in full.
A secured loan could be helpful if you’re trying to establish or rebuild credit. This loan also lowers the financial institution’s risk of lending you the money because if the loan is defaulted on, the lender can take the collateral.
Keep in mind. With a secured loan, you risk losing your collateral if you default on the loan. Also with this loan, you may be limited to how much you can borrow based on your credit and the collateral you're using for the loan.
Line of Credit.
A line of credit is a revolving, open-ended loan, and it does not require collateral to qualify for a loan. A line of credit gives you access to your money whenever you need it. You could withdraw cash or transfer the funds directly from the available line of credit up to the amount approved for a certain period of time. You don't pay interest on a line of credit until you borrow money from it.
Because collateral isn’t required to secure a line of credit, the interest rates may be higher compared to other loan products that require collateral. Also, with a line of credit, the interest rates are variable and could change based on your credit and the market.
Ways you can use your consumer loan.
In most cases, with a consumer loan, you can decide how you want to use the funds. You could use it for almost any expense. However, there are financial institutions that may have restrictions on how the money can be used, so be sure to ask about any restrictions before applying for a loan. Here are the most common ways people use their consumer loans.
- Large purchases such as furniture
- Debt consolidation
- Wedding expense
- Car repairs
- Home improvement projects
- Starting a small business
- Medical bills
- Emergency expenses
A consumer loan could help you finance your dream vacation, consolidate your debt, or make home improvements. While there are many loan options available, make sure you compare them all so that you can select the one that best meets your financial needs.
At AllSouth, we offer these loans at competitive interest rates and loan terms. For more information, check out our consumer loan options to find the loan that best meets your needs.
1Personal Loans: Rates and terms are subject to change without notice. Rate determined by creditworthiness and term of loan, so your rate may differ. Maximum loan amount is $15,000. Loan terms are dependent on amount borrowed.
2Share and Certificate Secured Loans: Rates and terms are subject to change without notice. Terms and conditions are determined by creditworthiness. Maximum loan amount is 95% of the deposit account balance. Certain conditions and restrictions may apply.
3Line of Credit: Rates and terms are subject to change without notice. Rate determined by creditworthiness and term of loan, so your rate may differ. Maximum line of credit amount is $15,000. Loan terms are dependent on amount borrowed.