Every year, personal loans are used by millions of Americans to cover expenses ranging from home improvements to consolidating debt. Before you apply for a personal loan, be sure you understand what the loan entails, what you are responsible for, and how to qualify. Understanding this information can have a positive long-term effect on your financial health.
 
Secured vs. Unsecured Personal Loans: How do they differ?
A secured personal loan is one that is backed by collateral, or protected by an asset. The asset could be stocks, bonds, or personal property belonging to the borrower. Considered one of the most common ways to borrow large sums of money, secured loans typically offer lower interest rates, longer repayment terms, and higher borrowing limits when compared to unsecured loans. If borrowers are unable to make their payments on the secured loan, then the lender usually reserves the right to claim the collateral as payment for the debt. Examples of secured loans include mortgages, auto loans, boat loans, and a home equity line of credit (HELOC).
 
An unsecured personal loan is not backed by collateral. Since there is no collateral to claim as payment for the loan if the borrower is unable to make payments, interest rates tend to be higher on unsecured loans. Examples of unsecured loans include credit cards, student loans, and personal loans. When applying for an unsecured loan, lenders typically determine whether you qualify based on your financial history or creditworthiness.
 
Personal Loans: The 411
As mentioned previously, a personal loan is a type of unsecured loan. Personal loans are typically smaller loan amounts when compared to other loan types and can offer low interest rates for borrowers. A personal loan is an installment loan, meaning you borrow a fixed sum of money and promise to pay it back, and some interest, with monthly payments over the life of the loan. As an installment loan, the borrower pays a fixed amount during a set period of time until the full amount borrowed is repaid.
 
One of the most appealing aspects of personal loans is the versatility; there are no restrictions on how you use the borrowed funds. From consolidating debt to paying off medical bills or financing home improvements, personal loans can be used to help you pay for virtually anything you desire.
 
What to Know Before You Apply
When applying for a personal loan, remember that the amount you qualify for and the terms are based upon your credit health. The higher your credit score, the better terms you qualify for. Terms include the interest rate, the monthly payment, and the number of months or years you have to repay the loan. Your payment history and income are also taken into consideration.
 
Your debt-to-income ratio will be analyzed, which follows this formula:
 
Monthly debts (from credit reports) +
PITI (principal, interest, taxes, insurance) ÷
Gross monthly income =
Debt-to-income ratio
 
Your debt-to-available-credit will also help determine the terms you qualify for. The more revolving credit you have, the more faith the lender has in you as a borrower.
 
Ready, Set, Apply!
At Arbor Financial, we like to have options, so we give you plenty. We offer low, competitive loan rates that help you get more for your money with flexible terms to fit your lifestyle. When you’re ready to apply, you can visit any branch, call our virtual loan center at 269.488.5945, or apply online on our website. It’s free and easy to apply!

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