Personal Loans are either secured of unsecured loans to an individual. Secured loans have some form of collateral such as a car, stocks (margin loan) or a house (home equity loan). Unsecured loans are usually involve less paperwork (which is often an attraction to the borrower – though margin loans often take no paperwork). The interest rate on unsecured loans is normally higher since the lender does not have collateral.
Credit cards are a form of unsecured personal loan. They normally are the worst way to borrow money (though for a very short term loan – say a month or two – when you factor in the ease of use they can be the best option). The problem is many people treat their credit card as a normal source of loans. This is a bad personal finance strategy. See our credit card tips for more information.
Personal loans often have “teaser” rates – interest rates that are low (and quoted in big bold colors) while the real rate is hidden in small type. Don’t fall for the hype. The Annual Percentage Rate (APR) helps you look through the hype to the real cost, but is still not a perfect measure of the cost to the borrower.
A MSN money article discusses the horrendous terms of some “payday loans”: Loans with triple-digit interest. Read more about personal loan terms such as: payday loans, Annual Percentage Rate (APR), line of credit, etc..
Related: Payday Loans = Costly Cash, FTC Alert – Learning About Mortgages – How Not to Convert Equity – personal finance articles on loans
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“Payday and car-title lenders tend to cluster in low-income neighborhoods—especially around military bases, where families are young and borrowers aren’t very savvy about interest rates. Congress recently slapped a 36 percent interest-rate cap on loans made to members of the armed services…”