The Rates Are Higher Because The Risk Is Greater

Online, July 31, 2011 (Newswire.com) - Personal loans come with higher interest rates than most other loans. Most people know this. But what many don't understand is why the rates are higher. It's simply because the loans aren't secured, and the lenders charge a higher rate to cover their risk.

A secured loan is guaranteed by property, and therefore has a lower interest rate. A mortgage is a secured loan, guaranteed by the home itself. If the borrower defaults on the loan, the lender can take possession of the home in order to recoup his losses. The fact that the borrower was able to provide collateral is what drives down the interest rates on secured loans. Secured loans are considered good risks for lenders.

An unsecured loan does not use collateral. Since no property is used to guarantee the loan, it's a much greater risk for the lender. If a borrower uses a home equity loan to obtain a $15,000 loan, the lender can count on the fact that the loan is secured by the home. The lender knows the borrower will pay the loan back.

But a personal loan without collateral for the same amount isn't as safe for the lender. Because of this, the lender will charge higher interest rates to balance out the increased risk.

Even though interest rates on personal loans are higher than those on secured loans, personal loan interest rates are usually still lower than credit card rates. If a secured loan is not an option for you, consider a personal loan, rather than using a high interest credit card.

Before you sign on the dotted line, however, be sure you understand the terms of the personal loan. There may be fees, both for late payments and for paying the loan off early. Ask about these up front. You should also make sure you only borrow what you are truly capable of repaying.