Which Type of Loan has the Best Interest Rates?

Loans of any kind are debts by default, so it’s wise to do the due research before taking money from the first creditor you find. Out of the many considerations, the interest rate charged on the loan amount deserves special attention, as that’s what will determine how much you end up paying at the end of the tenure.

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The Various Factors Which Affect Interest Rates

The rate of interest charged will vary. Depending on the lender, the loan type, the borrower’s credit score, and his/her credit history. Out of these factors, the loan type is going to be the most significant determinant for the interest rate charged on the loan. Followed by your credit score and history.

 What are Your Options?

There are multiple subdivisions, but almost all personal loans can be categorized as secured or unsecured loans. You may notice peer-to-peer loans and credit union loans as being marketed as separate types of loans, but that’s not accurate.

P2P and credit union are only the creditors who provide the loans, not has nothing to do with the structure of the loan. Loans from them can be categorized as secured or unsecured advances all the same.

Secured Loans are Offered at the Most Competitive Interest Rates

Secured loans have the most competitive interest rates in the market and they are in many ways the safer option as well. The creditors charge a much lower rate of interest on a secured loan because they have an assurance or collateral to rely on, in case the borrower fails to pay back the money they are owed. Even big, secured loans are also financially less risky for the borrower because they are not technically spending money they don’t have.

For example, in a secured loan where a car is kept as collateral, the borrower will only lose the car if he/she cannot pay the loan amount + interest back. It may not be the most ideal situation, but the creditor will not be able to take anything else, the borrower won’t necessarily have to go bankrupt, and they will be debt-free as well.

Unsecured Loans Have Higher Rates

An unsecured loan is given to a borrowing party on the basis of their credit score and without taking anything in collateral in exchange. Payday loans, short term loans and the like are all unsecured loans, so creditors charge higher interest rates on them. This is owed to the fact that the creditor is technically taking a risk by lending that money without security.

On top of that, the interest rates for unsecured short-term loans can become ridiculous if you miss even a single payment or stretch it out over a longer repayment period. Just in case you have bad credit, you will hardly find a lender willing to give you an unsecured loan, but there are a few that will give you loans at even higher interest rates. Failing to pay the minimum amount gives the lender a chance to take everything they need to until the debt plus interest is settled.

In light of these facts, it’s safe to conclude that secured loans such as auto loans or mortgages might take longer to get approved, but they may be a better option with lower interest rates.

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