WHY ARE PERSONAL LOAN INTEREST RATES HIGHER?

Interest rates associated with unsecured personal loans are typically higher than other types of loans. Reason being is that personal loans are not secured/backed with any type of collateral.

Secured loans
Since secured loans are backed by some sort of personal property, interest rates are lower. For example, a car loan is a secured loan, guaranteed by the vehicle you are buying. If you default on your loan, the lender will take ownership of the car, otherwise known as repossess, in order to recover the money from the loan that has been defaulted on. Since the lender has the car as collateral in the event that the loan is defaulted on, interest rates for car loans are lower than those associated with personal loans. Also, since your car is being utilized as collateral, it guarantees the lender that the you intend on repaying your loan. Overall, secured loans are viewed as positive risks for lenders, which is why they have lower interest rates.

Unsecured loans
As mentioned above, unsecured loans do not have any sort of collateral tied to them. Therefore, these types of loans are more risky for lenders.  For example, suppose you take out a $20,000 equity line of credit. Your lender is assured that you are not going to default on your loan being that your loan is secured with your house. On the other hand, an unsecured personal loan in the same amount is not as safe of an investment for your lender. Therefore, lenders will adjust interest rates to higher amounts to stabilize the increased risk.

Although the interest rates and APR associated with unsecured personal loans are greater than those associated with secured loans, personal loan interest rates are typically still lower than rates tied to credit cards. If you do not want to apply for a secured loan, or are a renter and have no home to secure a loan with, then a personal loan is likely a wiser decision than credit cards.

If you are interested in determining if a personal loan is the best option for your needs, then visit our being a wise borrower section. Then you can apply for a personal and get the cash you need within a few hours! Learn more about the personal loans we offer.

Personal Loan Interest Calculator
Paying Taxes On Personal Loan Interest You Receive When Lending Money to Friends or Family
Factors That Determine Interest Rates

 

 

 

 

 

 

 

 

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