There are different types of personal loans with different rates of interest. Lenders may consider the applicant’s credit history for some loans, while for others they consider assets and income. In order to get a personal loan it is usually necessary to provide proof of employment and income. Some lenders may require that applicants be employed for a period of at least one year with the same employer before granting a personal loan.

Unsecured Personal Loans

An unsecured personal loan is also called a signature loan. This type of loan does not require that the borrower have assets that offset the amount of the loan. Acceptance for an unsecured loan is usually based on a person’s credit score which makes unsecured loans difficult to get. Since the lender does not have assets he or she can collect to offset the loan if it is not repaid, unsecured loans usually have higher interest rates than secured loans. Most lenders are reluctant to extend unsecured loans to those with poor credit histories since they face a greater risk of loss.

Secured Loans

The two most common forms of secured loans are automobile loans and mortgages. The lender retains an interest in the security (car or house) until the loan is repaid; they protect their interest by retaining the title of the car or the deed to the house. The borrower receives the title or deed when the loan is repaid. If the borrower doesn’t repay the loan, the lender can repossess the car or house and sell it to cover the outstanding balance. If the security sells for less than the balance of the loan, the borrower is still responsible for the difference.

Applying for a Personal Loan

The interest rates of different lenders can vary significantly on the same type of loan. By comparing the interest rates of several lenders, consumers can often save hundreds or even thousands of dollars on interest payments. Borrowers should look at the rates from several different lenders before deciding which lender is the best one for their loan. Unless a borrower has a high credit score it will be extremely difficult to get acceptance for an unsecured loan, so most borrowers will need to have a financial asset which they can use as security.

Personal Loans and Taxes

Although mortgage interest is tax deductible, the interest on personal loans cannot be used as a tax deduction in most cases. Loans used to pay for education are an exception and interest from these loans is tax deductible. The funds received on a loan are not taxable since they do not count as income because they must be repaid. If a loan is forgiven and repayment is not required, the loan may then be considered a gift and have to be reported. An income tax professional can assist borrowers in determining deductions for loan interest and whether a gift must be reported.

Even people with bad credit can find secured personal loans, although they will probably have to pay higher interest rates than those with good credit. However, comparing the rates of several lenders can save consumers money on interest payments.