A personal loan is one that is unsecured such as a loan to rebuild your car engine. That is, a personal loan is not secured by something that the bank can take if you do not pay that loan back on time. These unsecured loans are relatively rare today unless you deal with a small local bank (which are also rare today). Today most banks would tell you to use a charge card for these types of loans rather than sign an unsecured loan. However, as personal loans do still exist, you should understand what you are getting into with them.
As with any loan, you are signing a contract. And what is written on that paper in black and white is very seldom negotiable. Therefore, if you borrow money for some reason, be aware that the bank will come after you for repayment even if there is no collateral involved.. If you need money to start your own business and then cannot make those payments, the bank will take you to court and will win their case easily. In other words, stay away from personal loans if at all possible.
Consolidation loans are usually personal loans also. Again, we see ads every day asking us to consolidate all of our outstanding debt into one loan. They tell you that this will usually mean a smaller monthly payment for you. However, which is better? Should you continue to pay off your loans or now have one loan that may be a smaller monthly payment but will just take you longer to pay off? Remember that the consolidation loan will pay off your debts plus all of the interest you would be paying on them. However, you will now be paying a bigger loan with additional interest on it and usually the interest is much higher. Also, if you get into even more financial trouble in the future, instead of having several smaller payments each month that you can work with the lending agency in order to make smaller payments or even float one payment for a couple of months, you will now have one big payment that you must meet every single month no matter what. We are talking even more pressure here.
Please stay away from these consolidation loans. They will not help you financially in the long run and can definitely end up hurting you.
Collateral Loans
A collateral loan is secured by something. In other words, you get the money you want but the bank can take from you whatever item or items you used as collateral if you default on the loan. Let’s say you took out a few thousand dollars to start a small business and used your stock holdings as collateral. If you do not pay back that loan, the bank can sell the stock to cover the loan. If the sale of the stock does not cover the entire loan, the bank will sue you for the remainder of the loan plus court costs and interest. There is no room for negotiation on these types of loan as you have nothing to negotiate with.
Therefore, a house mortgage or a car loan are types of collateral loans. No financial institution wants to repossess your car or foreclose on your house. It is a lot of bother and they will generally end up losing money in the process. That is, because your house has devalued instead of gaining equity, the bank will not be able to resell it for its original value. And even a one-month old car immediately depreciates as soon as it is driven off the lot so they will be lucky to get back their loan money on it if they have to repossess.
And do you want them to repossess or foreclose? Of course not. For one thing, you have already paid a good deal of money out of your pocket that you will not ever see again. For another thing, it will go on your credit report and it will be a long time before you are able to buy another house or car. And even if you do get a future loan, it will be at a higher interest rate because of the negative credit rating. We certainly want to avoid the result of not making our payments if at all possible.