When to Apply Personal Loan Rates

The question concerning when to apply personal loan rates may often appear during the course of a workweek. After all, most people who think of a personal loan equate that to an unsecured loan. Is that always the case? When does one need to differentiate between the rate for a secured and unsecured loan?

Distinction Between Interest Rates

Most lenders have a marked difference in interest rates on personal unsecured loans compared to secured loans. In some cases, the difference may be as much as three to four-percent depending on the lender, the amount of the loan, and the credit score of the borrower. On the other hand, some secured loans lack the ability to cover the entire basis of the loan, and raises a question concerning the lender's right to apply personal loan rates to a secured loan. In some cases, the lender may have a valid argument because other than real estate, any other type of collateral depreciates over time, so if you bought a car three years ago, by the time you finish paying for it, you may owe more on the car than it is really worth. What happens in the event that the car is stolen or totalled in an accident? The insurance company is going to pay market value for it regardless of your loan balance, thus leaving the lender holding the bag for the remainder unless there is insurance to cover the deficiency. You're still obligated to pay the balance, but is the lender obligated to still accept secured loan rates on a loan that is no unsecured?

Negotiation of Rate

In some cases, a lender may choose to apply personal loan rates for a secured loan for any number of reasons including the strength of the credit of the borrower. After all, a lender is not obligated to approve any loan as long as he follows company protocol and doesn't discriminate in an unlawful way. Why should he not collect a higher interest rate for some of the high-risk loans or if the collateral that a borrower pledged is not quite as secure as the lender would like it to be? The lender has an obligation to make sure that the money he loans has a good potential of being repaid. If he has any doubt about that, he is certainly within the realm of his jurisdiction to charge a higher interest rate if he doesn't feel comfortable with that and feels that the collateral does not provide him with enough security to cove r the transaction.

Exercise Caution

Of course, sometimes a lender may choose for any unknown reason to apply personal loan rates to a secured loan. In those cases, the borrower is within his rights to question why the lender feels the need to do that. Sometimes it is just an error in judgement, but in some cases, it is just the lender's way of getting more money out of the unsuspecting borrower. Therefore, you must be on your toes so that you know the rate you should be paying based on your credit score and the type of loan. Someone with a high credit score buying a two or thee year old car should certainly not expect for the lender to apply personal loan rates to that contract, so protect yourself and know the facts before you sign the contract.

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by John Mussi